Every intervention to prop up the yen simultaneously creates a new opportunity to short it. Just two weeks ago, an unprecedented joint intervention by the U.S. and Japan barely reversed the fundamental forces weighing on the yen, as the currency slides back toward 160 per dollar and heads for its worst week against the greenback since mid-May.
The key issue lies in the vast interest rate gap between Japan and other economies. Investors can borrow low-yielding yen and then funnel the proceeds into higher-yield assets—a strategy widely known as the "carry trade." This means that when intervention pushes the yen higher, investors actually get a better price to sell it.
Market observers, including JPMorgan Private Bank and State Street Bank and Trust Company, note that hedge funds have halved their bearish bets on the yen as of August 4, but some investors are beginning to return to yen-funded carry trades. Goldman Sachs strategist Karen Reichgott Fishman wrote in a report, "Yen carry positions are 'reduced, but far from over.'"
Yen borrowing costs rank among the lowest globally. Ashwin Binnwani, founder of private investment firm Alpha Binwani Capital, bought the dollar-yen pair near 157, a position that will profit as the yen weakens. During London trading on Friday, the pair was at 159.16. Binnwani stated, "Intervention is a prime opportunity to sell yen at higher levels. We are not intimidated by their actions. The carry trade is too tempting to pass up."
This opportunity comes with significant risk. As investors rebuild short positions, they also raise the likelihood of renewed regulatory intervention. However, the fundamental forces suppressing the yen persist. Japan's 1% policy rate is lower than most developed economies, and fiscal concerns add to the pressure. The yen has already given back half of the gains from the intervention, depreciating against nearly all major counterparts over the past week.
Year-to-date, strategies involving borrowing yen, shorting it, and buying high-yield currencies like the Colombian peso, Turkish lira, and Norwegian krone have each delivered returns exceeding 10%. Strategist Mark Cranfield notes that the rise in one-year yen forward prices should sound alarm bells in Tokyo. This move, typically linked to direct dollar buying, suggests forex traders are using the yen's post-intervention bounce to reload carry trades and position for another prolonged period of weakness.
Bart Wakabayashi, Tokyo branch manager at State Street Bank and Trust Company, says the firm's proprietary data shows real-money accounts are still building carry trades, selling yen to buy a range of G10 currencies. He notes the strongest interest is against the Australian dollar, followed by the euro, U.S. dollar, Canadian dollar, and British pound.
Yuxuan Tang, Asia head of interest rate and FX strategy at JPMorgan Private Bank, says, "Unless we see a meaningful bearish turn in the dollar and U.S. Treasury yields, carry traders could push the pair to retest 162." She adds that the market also recognizes repeated intervention is becoming increasingly costly for Japan.
Analysis based on central bank accounts suggests Tokyo likely spent about $34 billion on July 31 to intervene in the forex market to support the yen. This follows an estimated $53 billion spent the previous day, which, if confirmed, would be the largest single-day intervention on record. U.S. Treasury Secretary Scott Bessent reaffirmed Washington's support for a stable yen, stating that yen weakness could trigger broader depreciation risks across Asia and that Washington would "do whatever it takes" to support Japan.
Not only hedge funds are engaging in this trade. Preliminary data from Japan's Ministry of Finance released on Friday shows Japanese investors last week bought the largest amount of overseas assets in over two years, capitalizing on the yen's brief post-intervention bounce. A surge in Japanese portfolio outflows following intervention is evident.
The yen's appeal as a funding currency could diminish if traders anticipate further intervention or Bank of Japan action. Either move could trigger episodic volatility, forcing investors to unwind positions quickly and amplifying price swings across markets. According to sources, the government of Prime Minister Sanae Takaichi, signaling growing concern over yen weakness, supports the Bank of Japan's recent rate hike, with the next move likely in September or October.
Even after intervention, yen bears remain united. Carol Lye, portfolio manager and senior research analyst at Brandywine Global Investment Management in Singapore, says, "If intervention succeeds in preventing further depreciation, the yen should not break above 162." She adds that carry trades could instead be funded through other relatively low-yield currencies like the euro or Swiss franc.
Investors like Damien Loh, chief investment officer at Ericsenz Capital in Singapore, are not deterred. He started buying the dollar-yen pair again around 157 after the last intervention. Loh says besides earning positive carry, the trade also acts as a hedge against other short dollar positions in his portfolio. "I'm bullish on long gold or long Australian dollar because the dollar devaluation narrative is fully back," Loh says. "If I don't want to take on excessive dollar exposure, I can just buy dollar-yen. That gives you a hedge, and it also pays you positive carry—perfect days."
Overnight index swaps show traders are betting the Bank of Japan will raise rates by 25 basis points by October, though this would do little to close the gap with the U.S. Despite mild U.S. inflation data reducing expectations of an imminent Fed rate cut, the central bank may still tighten policy this year. George Efstathopoulos, a portfolio manager at Fidelity International, believes demand for carry bets will persist, but with increased volatility backed by the U.S. "As long as the Bank of Japan remains behind the curve, yen-funded carry trades can continue to thrive," he says.
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