Hedge funds have shifted to a bullish stance on the Japanese Yen, marking the first time since mid-2025 that speculative positioning has been net long. This change is reflected in the Commitments of Traders (COT) report, which shows a dramatic surge in JPY net speculative positions to 120.4K contracts, up from 10.8K previously. This significant increase suggests growing confidence among traders in the yen's appreciation against the dollar.
The bullish sentiment follows the Bank of Japan's recent decision to raise its policy rate by 25 basis points to 1.25%. While the BOJ's forward guidance remains cautious, projecting underlying inflation to reach its 2% target only between the second half of fiscal 2026 and fiscal 2027, the commitment to further hikes has encouraged investors. This cautious tightening, however, contrasts with the Federal Reserve's hawkish stance, which continues to support the dollar, keeping the USD/JPY pair near 158.00.
Several factors contribute to this renewed interest in the yen. The prospect of BOJ rate hikes, coupled with potential capital repatriation by Japanese institutional investors and the unwinding of carry trades (where investors borrow cheap yen to invest elsewhere), are creating new tailwinds for the currency. J.P.Morgan analysts Junya Tanase and Ikue Saito estimate that if approximately 17 trillion yen ($108.74 billion) in yen short positions accumulated since Prime Minister Takaichi took office were fully unwound, the USD/JPY could fall to the 142–146 range.
The yen's recent volatility and shift in sentiment are likened to tectonic plates grating, signaling increasing frequency of significant movements before a major shift. The currency has seen a 2.3% surge against the greenback in the past week, the largest since a rare joint intervention by the U.S. and Japan in late July. Despite the BOJ's recent rate hike, the yen initially fell as much as 1.3% against the dollar, with two board members dissenting on the hike, indicating internal resistance to tighter policy and contributing to market disappointment.
Brown Brothers Harriman, through strategist Elias Haddad, has revised its USD/JPY outlook to bullish, acknowledging the BOJ's commitment to further tightening despite its cautious forward guidance. The market remains sensitive to the diverging monetary policies between the BOJ and the Federal Reserve, with resistance levels for USD/JPY noted at 158.42 and 160.00.
