Have hedge funds turned bullish on the yen for the first time in 14 months, signaling a reversal in carry trades?

According to Odaily, data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday showed that hedge funds cleared their short positions on the yen and began establishing long positions in the yen for the week ending September 15—this marks the first time leveraged funds have turned net long on the yen since July 2025, as well as a notable shift in sentiment after the joint forex intervention by U.S. and Japanese authorities several weeks ago. These funds currently hold approximately 251 billion yen ($1.6 billion USD) of net long positions on the yen.

The same set of CFTC data also showed that, as of September 15, speculative traders—including asset managers and non-commercial participants—overall reduced their net long bets on the U.S. dollar, reaching the lowest level since March. Ironically, the dollar recorded its biggest weekly gain in three months this week.

Sentiment Shift After Intervention

This reversal to net long occurred after authorities in the U.S. and Japan jointly bought the yen from late July to late August. The yen had fallen to near 164 over the summer, its weakest since 1986. On August 3, Japan’s Finance Minister Shunichi Katayama and U.S. Treasury Secretary Janet Yellen jointly confirmed the coordinated intervention; according to Japan’s Ministry of Finance data, authorities spent 15.4 trillion yen (about $96.4 billion USD) propping up the yen between July 30 and August 26—a single-month intervention record. Actions on July 30 and 31 marked the first U.S.-Japan joint intervention since 1998. Even so, on August 31 the yen dropped below 160 again. On Friday, the New York close was at 156.88.

Another backdrop to this shift is the historic build-up in yen short positions. According to Jefferies' analysis of Bank for International Settlements (BIS) data, as of March this year, cross-border yen lending—an indicator of carry trades—soared to a record 360 trillion yen ($2.35 trillion USD). Charu Chanana, Chief Investment Strategist at Saxo Bank, previously warned that such positions are “very vulnerable,” and that a further strengthening of the yen could turn the gradual unwinding of leverage into a faster and self-reinforcing squeeze.

The timing of hedge funds turning net long coincided with the week prior to the meetings of the two central banks—what happened next soon put these new positions to the test.

Central Bank Week: Rate Hikes Land, Signals Dovish

The Federal Reserve raised rates by 25 basis points this week, lifting the federal funds target range to 3.75%-4.00%. The Bank of Japan subsequently increased its policy rate from 1.0% to 1.25%, a 31-year high, just three months after the June rate hike, which is the shortest interval between hikes since 1990.

The decision passed with seven in favor and two against; the two dissenting votes came from committee members newly appointed by Prime Minister Sanae Takaichi’s government. Governor Kazuo Ueda said at a press conference that Japanese monetary policy has “entered a new phase,” and when asked whether a rate hike above 25 basis points at one time was possible, he said "various possibilities exist depending on price developments," but did not explicitly indicate another rate hike in October.

Surveys show that markets generally expect the policy rate to rise to 1.5% by the end of March 2027, and to 1.75% in the second quarter. As the original article noted, the signals released by the Bank of Japan disappointed some market participants who were hoping for a clearer path of consecutive rate hikes, leaving newly net long traders at risk of being outmaneuvered.

Strategists are notably divided on the near-term direction of the yen. Wells Fargo strategist Chidu Narayanan believes the threshold for the BOJ to meet or beat the market’s hawkish expectations is very high and recommends shorting the yen; ING G10 FX head Chris Turner recently estimated that if the BOJ failed to send out further rate hike signals, the yen would depreciate to the 157-158 level against the dollar. State Street's Head of Macro Strategy, Asia-Pacific, Choi Ji-Wook, holds a bullish view, expecting the BOJ to continue rate hikes in December and March next year, sending rates to 1.75%; he sets a three-month dollar/yen target at 152.5 yen.

V-shaped Reversal and Intervention Alarms

During the New York session on Friday, the yen fell as much as 1.3% against the dollar. The dollar/yen pair broke above 158 to a two-week high during the European session; afterwards, there were reports that the Bank of Japan had conducted a “rate check” with market participants—such moves are often seen as a prelude to official intervention. Within roughly an hour, the yen rallied by over one yen against the dollar, and the dollar/yen retreated from near 158 to the 156 range, closing in New York around 156.80.

Institutions were in broad agreement in their interpretation of the rate check. Bank of America FX strategist Alex Cohen told Odaily that the yen’s sharp depreciation following the BOJ rate hike means that “today’s rate check is yet another warning sent to the market,” and that Japan’s Ministry of Finance has shown its willingness to use large amounts of foreign reserves to intervene. Analysts pointed out that such measures might make traders think twice about chasing yen depreciation, “especially as the exchange rate approaches 160.” Furthermore, as Japan is approaching a public holiday period, thinner trading volumes could magnify the impact of official actions on exchange rates, making markets particularly sensitive at this time.

CFTC’s position data serves as a window for investors to observe this $9.5 trillion per day FX market and track the derivatives positions of hedge funds and asset managers.

Carry Trades: Will There Be Another Reversal?

All discussions around yen positioning ultimately boil down to the same question—will carry trade positions experience another forced liquidation? The reference point is August 2024: at that time, a BOJ rate hike plus softening U.S. employment data triggered a rapid yen rally, forced carry position unwinding, and violent swings in global risk assets.

According to estimates by CICC, hedge fund net short yen positions rebounded to about 110,000 contracts on September 2, but had fallen to about 50,000 by September 9, a drop of more than half from the peak. CICC thus believes that the overall scale of carry trades has contracted significantly, making “the probability of another large-scale reversal relatively limited.”

But the basis for carry trades has not disappeared. The absolute yield spread between U.S. and Japanese benchmark rates remains at 250 to 275 basis points; as long as both central banks’ policy stances remain unchanged, the foundation for yen “carry trades” endures and international financial markets may seek opportunities to short the yen again. Analysts also caution that a dramatic yen crash would push up Japanese government bond yields, force carry trades to unwind, and directly impact U.S. treasuries and equities—explaining why authorities in both the U.S. and Japan have low tolerance for disorderly foreign exchange moves.

The longer-term impact, meanwhile, lies at the structural level. 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, and the incentive for Japanese insurers, pensions, and banks to allocate more overseas assets may weaken—in turn, this is more likely to manifest as a marginal contraction in yen funding and a slowdown in new overseas allocations, which would marginally drive up global funding costs and long-term interest rate centers.

Capital is already flowing back: as of August 22, Japanese investors had net sold about 3 trillion yen of overseas bonds this year, the largest for the same period since 2022; according to a JP Morgan survey of 82 Japanese corporate pension funds, the net proportion planning to increase domestic bond holdings is the highest since 2008.