The yen has surged to a one-month high for a second straight session, reaching the low 155 range against the dollar after months of weakness that persisted even following a currency policy agreement between the United States and Japan a month ago. Driving the move are growing expectations that the Bank of Japan will raise its policy rate this year, including as early as this month, in response to U.S. pressure. Speculation that the Government Pension Investment Fund (GPIF), the world's largest pension fund, will increase its allocation to yen assets has also helped lift the currency. Investment banks warned that a break below 155 yen per dollar could trigger further selling in the market and accelerate the yen's rally.
The yen climbed as far as 155.3 per dollar during trading on the 4th, its strongest level in a month, before settling in the 156.2 range, Japan's Nihon Keizai Shimbun reported. That marks a gain of more than 5 yen, or 3.2%, in two days from 160.39 per dollar on the 2nd.
The rally came after Bank of Japan officials suggested rate increases could be larger than expected. Hajime Takata, a BOJ policy board member widely seen as a hawk, raised the possibility of a "big step" — a half-percentage-point increase in one move — at a press conference on the 2nd. "There is no need to limit rate hikes to roughly once every six months or to fix the size of increases at 0.25 percentage point," he said. Nomura Securities said the BOJ could deliver three consecutive rate increases through December if the yen remains weak.
Signs that Japan's public pension fund may step up purchases of Japanese government bonds also played a role. Word emerged belatedly on the 3rd that the fund had convened its board of governors on the 21st of last month, its first such meeting in seven years. Bloomberg said the move broke with convention and raised the possibility that the fund had begun the process of increasing its allocation to Japanese bonds. Market participants expect that any actual purchases of Japanese government bonds by the fund would begin to have an impact from next year.
That has prompted analysis that yen carry trade positions, built to exploit interest rate differentials, are starting to unwind. Traders borrow yen to buy higher-yielding assets in markets such as the United States, Brazil and Mexico, profiting from the rate gap. The strategy works when the yen holds steady or weakens, but a stronger yen raises the cost of repaying those loans and erases the returns.
Leveraged funds' net short positions in the yen as of the 25th of last month were more than double the average since 2020, according to the U.S. Commodity Futures Trading Commission. Masayuki Nakajima of Mizuho Bank in London said the main driver was the unwinding of yen short positions, largely in hedge fund accounts, adding that expectations for further BOJ tightening had also grown.
Strategists at JPMorgan Chase said that if the yen strengthens past 155 per dollar, a substantial unwinding of short positions could accelerate the currency's gains. Traders who bet on a weaker yen are long dollars and short yen, meaning they must rush to buy yen to close out positions and limit losses when the currency strengthens. Those purchases push the yen higher still, triggering stop-loss selling by other investors and setting off a chain reaction that speeds up the rally. JPMorgan estimates short yen positions total 16 trillion to 17 trillion yen.
Still, JPMorgan said expectations for the pension fund and the BOJ look "somewhat excessive," and judged that the dollar-yen rate is unlikely to fall far below its projected range of 155 to 165 yen for now.
