As the Bank of Japan's June policy meeting approaches, hedge funds are bracing for further weakness in the yen. They believe that even another interest rate hike would do little to reverse the structural depreciation pressures facing the currency. With the market having already almost fully priced in expectations for a 25-basis-point hike this month, these fast-moving 'agile capital' players are increasingly shifting their core focus to a different question: whether the Bank of Japan truly has the capacity to initiate a sustained cycle of monetary tightening.

Firms such as Fivestar Asset Management Co. and Palinuro Capital are currently holding short positions on the yen. Meanwhile, Simplex Asset Management plans to tactically establish short-yen option positions in stages, but only if the yen rebounds past the level of 159 yen per US dollar.