Speculative yen selling has surged in the market as the currency's value plunges to a 40-year low. With the U.S. economy remaining robust and the Federal Reserve's tightening stance expected to sustain a strong dollar, the unusual yen weakness appears set to continue for the time being.
Bloomberg reported Friday, citing the U.S. Commodity Futures Trading Commission (CFTC), that hedge funds' yen short positions stood at 138,000 contracts as of the 30th of last month, the highest in 19 years since June 2007, when the figure was 154,000 contracts. In 2007, just before the Lehman Brothers bankruptcy filing (September 2008) that triggered the financial crisis, the interest rate gap between the United States and Japan had widened to as much as 5 percentage points, driving yen carry trade demand to its peak.
Behind the rise in speculative yen selling lies the market's distrust of the Bank of Japan's monetary policy. The Bank of Japan raised its benchmark rate to 1% last month for the first time in 31 years and signaled the possibility of further hikes, but the dominant concern in the market is that it remains "behind the curve," with tightening lagging prices and the exchange rate.
The Takaichi Sanae cabinet's aggressive fiscal expansion stance is also cited as a factor fueling yen weakness. In the "Basic Policy on Economic and Fiscal Management and Reform" (Honebuto Policy) finalized on the 30th of last month, the government deleted the "fiscal consolidation" wording that had been specified every year through last year. The Japanese government intervened to defend the yen by injecting a record 11.73 trillion yen (about 110 trillion won) over one month starting in April this year, but this was insufficient to quell market concerns.
Market unease is also reflected in long-term government bond yields. The yield on 30-year super-long bonds, interpreted as a gauge of the government's fiscal standing, briefly surged to 4.105% on the morning of the 7th, approaching the record high of 4.2% set in May. When long-term rates rise, the government's interest burden increases, pressuring the Bank of Japan to expand its bond purchases. This offsets the effect of the benchmark rate hike, further heightening market concerns and ultimately leading to downward pressure on the yen.
A strong dollar originating in the United States is also fueling yen weakness. The U.S. economy has shown solid momentum, and new Fed Chair Kevin Warsh signaled a tightening stance by referring to "price stability." According to CFTC data, bets by traders anticipating a stronger dollar increased to about $40 billion (about 61 trillion won) as of the 30th of last month. This is the highest level in about a decade since December 2015.
As a result, pessimism has emerged within Japan that the yen could reach around 170 yen per dollar. The Nihon Keizai Shimbun reported that observers see the possibility of the yen weakening into the 170-yen-per-dollar range if the funding sources for the Takaichi cabinet's expansionary fiscal policy are not clearly revealed.
However, the Japanese Ministry of Finance's auction of 30-year government bonds held on the 7th drew unexpected demand, partly calming market unease. The bid-to-cover ratio, calculated by dividing the total bid amount by the accepted amount, was 4.55 times, the highest since May 2019 (4.65 times). The tail, the difference between the lowest accepted price and the average accepted price, where a smaller figure indicates a stronger auction, was 4 sen (0.04 yen), the narrowest since January 2025.
Analysts say the unusual yield of around 4% contributed to the success of the 30-year bond sale. Miki Den, chief rate analyst at SMBC Nikko Securities, said, "It appears that 'real money' that manages actual long-term funds, such as pension funds and life insurers, flowed in." The market was also reassured after Minoru Kiuchi, Minister of State for Economic and Fiscal Policy, held a press conference that day and denied reports that "the government is guiding rates lower to support its fiscal expansion path."
Immediately after the auction results were released, the 30-year government bond yield fell to 3.993%, and the yen-dollar exchange rate briefly dropped to 161.67 yen, but showed mixed movements as it turned upward again during the session. Next week's scheduled auction of 20-year government bonds is expected to serve as another test.
