Economy

Yen Carry Positions Rapidly Resolved in Recent Yen Rally

REUTERS/Florence Lo/Illustration/File photo
A banknote of Japanese yen is seen in this illustration picture taken June 15, 2022.

Jiji Press

14:05 JST, August 12, 2024

Tokyo (Jiji Press)—So-called yen carry positions in the international monetary market appear to have been rapidly unwound as the yen has rallied about ¥20 per dollar in about a month after hitting a 37-year low.

The non-commercial sector’s net short position in yen futures on the Chicago Mercantile Exchange is seen as an indicator of speculative yen carry positions.

According to data from the U.S. Commodity Futures Trading Commission, the net short position hit a historically high level of 184,000 contracts on July 2, but plummeted to 73,000 contracts on July 30 and 11,000 contracts on Tuesday.

The Japanese currency hit ¥161.94 per dollar in early July, its weakest level in about 37 and a half years, but strengthened to ¥141.69 on Aug. 5 after the Bank of Japan raised its policy interest rate on July 31.

In yen carry trade, investors borrow yen funds at low interest rates and sell them for other currencies with higher interest rates.

The unwinding of yen carry positions is believed to have been triggered by a change in the assumption that interest rates would remain low in Japan and high in the United States.

In the United States, inflationary pressures remained strong in early July, dampening expectations of an interest rate cut by the Federal Reserve, but the U.S. government’s employment report on Aug. 2 boosted concerns about an economic slowdown, prompting investors to price in a September rate cut.

Meanwhile, BOJ Governor Kazuo Ueda hinted at a further rate hike later this year after the July 31 rate hike.

“Excessive yen short positions have been unwound,” said Shota Ryu, a currency strategist at Mitsubishi UFJ Morgan Stanley Securities Co.

Meanwhile, Shinichiro Kadota, director of currency and bond research at Barclays Securities Japan Ltd., said, “The interest rate gap between Japan and the United States is still wide, so yen carry trade could revive once market fears ease.”

The yen’s rally appears to have paused after BOJ Deputy Governor Shinichi Uchida said in a speech Wednesday that the central bank will not raise interest rates when financial markets are unstable.