Japan's efforts to shore up the yen are facing a wall of selling from carry traders. Market data shows these investors are using each bounce in the yen to rebuild short positions, creating a pattern: official intervention lifts the currency, and traders fade the move.
The U.S.-Japan joint intervention briefly pushed the yen higher, but within less than two weeks, USD/JPY was back near 160. For carry traders, official buying has effectively offered better levels to sell the yen.
The strategy runs on rate differentials. Investors borrow yen at low rates and put the funds into higher-yielding assets. As long as the yen fails to appreciate persistently, the interest income covers a good part of the currency risk.
Hedge funds had cut their yen short positions by roughly half as of Aug. 4, but some institutions are now rebuilding yen-funded carry trades. Market data shows USD/JPY has climbed from around 157 to 159.43. Some traders argue that if the dollar and U.S. yields do not show a clear decline, carry buying could push the pair to retest 162.
Japan reportedly may have spent tens of billions of dollars to support the yen in late July, with one day's intervention possibly reaching a record $53 billion. Yet the currency still slipped back toward 160. That highlights how much attention the market is paying to the Japan-U.S. rate gap and fiscal pressures.
The focus now shifts to the Bank of Japan's next move. Traders are betting on a 25-basis-point rate hike in September or October. Analysts, however, say that as long as Japanese rates remain well below those in major economies such as the United States, yen-funded carry trades are likely to continue.