Data from the U.S. Commodity Futures Trading Commission (CFTC) released on Friday shows that hedge funds cleared their bearish yen positions during the week ending September 15 and began establishing bullish positions favoring a stronger yen. This marks the first time leveraged funds have turned net long on the yen since July 2025, a notable sentiment shift just weeks after coordinated intervention by U.S. and Japanese authorities in the currency market. These funds now hold approximately 251 billion yen ($1.6 billion) in net long yen positions. The same CFTC dataset also revealed that, as of September 15, speculative traders, including asset managers and non-commercial participants, cut their overall bullish bets on the dollar to the lowest level since March — this comes even as the dollar recorded its largest single-week gain in three months this week.

The Sentiment Turn After Intervention

This shift to a long yen stance follows coordinated yen-buying operations by U.S. and Japanese authorities conducted from late July through late August. After the yen weakened to around 164 this summer, its weakest level since 1986, Japanese Finance Minister Satsuki Katayama and U.S. Treasury Secretary Scott Bessent jointly confirmed the intervention on August 3. According to Japanese Ministry of Finance data, authorities deployed 15.4 trillion yen (approximately $96.4 billion) between July 30 and August 26 to support the currency, setting a record for monthly intervention. Notably, the actions on July 30 and 31 represented the first joint U.S.-Japan intervention since 1998. Despite these efforts, the yen fell back through the 160 level on August 31 and traded at 156.88 in New York on Friday evening.

Another backdrop to this shift is the historic accumulation of bearish yen positions. According to Jefferies' analysis of Bank for International Settlements (BIS) data, cross-border yen lending — the hallmark of carry trades — had surged to a record 360 trillion yen ($2.35 trillion) by March this year. Charu Chanana, Chief Investment Strategist at Saxo Bank, had previously cautioned that such positions are "fragile," and that further yen strength could transform a gradual unwinding of leverage into a faster, self-reinforcing wave of position closures. The timing of hedge funds turning net long coincides with policy meetings at two central banks this week — and what followed quickly posed challenges for these new positions.

Central Bank Week: Rate Hikes Delivered, Signals Lean Dovish

The Federal Reserve raised interest rates by 25 basis points this week, lifting the federal funds target range to 3.75%-4.00%. The Bank of Japan subsequently raised its policy rate from 1.0% to 1.25%, marking a 31-year high, with the hike coming just three months after June's increase — the shortest interval between rate hikes since 1990. The decision passed 7-2, with two board members newly appointed by the Takaichi administration voting against it. Governor Kazuo Ueda stated at a press conference that Japan's monetary policy has "entered a new phase." When asked whether the bank might raise rates by more than 25 basis points at once, he responded that "various possibilities exist depending on price developments," but stopped short of signaling another hike in October. According to surveys, market participants generally expect the policy rate to reach 1.5% by March 2027 and further to 1.75% in the second quarter. The signals from the Bank of Japan disappointed some market participants hoping for a clearer path of consecutive hikes, leaving freshly established long positions exposed to potential setbacks.

Strategists remain divided on the yen's short-term direction. Chidu Narayanan, strategist at Wells Fargo, sees a high bar for the Bank of Japan to meet or exceed market hawkish expectations and recommends shorting the yen. Chris Turner, Head of G10 FX Strategy at ING, previously estimated that if the Bank of Japan failed to signal further hikes, dollar-yen could weaken to the 157-158 range. Conversely, Choi Ji-wook, Asia-Pacific Macro Strategy Head at State Street, holds a bullish view, projecting additional hikes in December and March next year that would take the terminal rate to 1.75%, with a three-month dollar-yen target of 152.50.

V-Shaped Reversal and Intervention Watch

During Friday's New York session, the yen fell as much as 1.3% against the dollar. Dollar-yen briefly broke above 158 in European trading, reaching a two-week high. Reports then emerged that the Bank of Japan had conducted "rate checks" with market participants — a move typically viewed as a precursor to official intervention. Within about an hour, the yen strengthened by more than one full yen against the dollar, with dollar-yen retreating from around 158 to the upper 156 range, eventually trading near 156.80 in late New York dealings.

Institutions have largely converged in their interpretation of this rate check. Alex Cohen, FX strategist at Bank of America, told a financial media outlet that with the yen still depreciating significantly even after the Bank of Japan's rate hike, "today's rate check serves as another warning to the market," noting that the Japanese Ministry of Finance has demonstrated willingness to intervene using substantial foreign reserves. Analysts suggest such tactics make traders think twice about chasing yen depreciation, particularly as the exchange rate approaches 160. Additionally, with Japan heading into a holiday period, reduced trading volumes could amplify the impact of any official action on the currency, making the current window particularly sensitive. The CFTC positioning data provides investors a lens into the daily $9.5 trillion forex market, tracking derivative positions of hedge funds and asset managers.

Carry Trades: Will There Be Another Reversal?

Every discussion about yen positioning ultimately converges on one question: will carry trades experience another concentrated liquidation? The reference point is August 2024, when Bank of Japan rate hikes combined with weakening U.S. employment data triggered a sharp yen surge, prompting a cascade of carry trade unwinding and causing significant volatility across global risk assets. According to estimates from China International Capital Corporation, hedge funds' net short yen positions rebounded to approximately 110,000 contracts on September 2, but had fallen to around 50,000 by September 9 — more than halved from the peak. Based on this, China International Capital Corporation concludes that the overall scale of carry trades has already contracted notably, and "the possibility of a reversal is relatively limited."

However, the fundamental basis supporting carry trades remains intact. An absolute interest rate differential of 250-275 basis points persists between U.S. and Japanese benchmark rates. As long as both central banks' policy stances remain materially unchanged, the foundation for yen carry trades will continue to exist, and international financial markets may once again seek opportunities to short the yen. Analysts also warn that if the yen experiences a disorderly crash, it would push up Japanese government bond yields, force carry trade unwinding, and directly impact U.S. Treasuries and equities — which explains why U.S. and Japanese authorities maintain limited tolerance for currency market disorder.

Longer-term implications are structural. As Japan's policy rate and government bond yields continue to rise, the cost advantage of the yen as a funding currency will gradually diminish. Japanese insurers, pension funds, and banks may see reduced momentum for increasing overseas asset allocations. This would more likely manifest as marginal contraction in yen financing scale and a slowdown in new overseas allocations, which could in turn marginally push up global funding costs and the long-term interest rate center. Capital flows are already reflecting this shift: as of August 22, Japanese investors had net sold approximately 3 trillion yen in overseas bonds this year, the largest such outflow for the same period since 2022. Meanwhile, a JPMorgan survey of 82 Japanese corporate pension funds shows the net percentage planning to increase domestic bond holdings has reached its highest level since 2008.