Japanese yen coins and banknotes are seen in this illustration photo taken June 16, 2022. REUTERS/Florence Lo/Illustration

Join now for FREE unlimited access to Reuters.com

LONDON/NEW YORK, Sept 8 (Reuters) – The Japanese currency’s precipitous fall has spread so far and fast that it is spooking big investors, and some are cutting bets on its further decline, anticipating policymakers could soon intervene to try to stop the free fall.

Those who sold the yen short have reaped juicy profits this year. It fell to its lowest level in 24 years on Wednesday and is down some 30% since the start of last year as expectations for US interest rates rose and Japanese rates went nowhere.

But this week’s nearly 3% drop, with no particular trigger, was enough for some funds to end the first leg of their bet that Japan should abandon its policy of capping bond yields as its global peers push rates up.

Join now for FREE unlimited access to Reuters.com

“We believe we are approaching a policy inflection point,” said Mark Dowding, chief investment officer of BlueBay Asset Management, especially as inflation begins to pick up.

“We maintained a short position in JGBs as an expression of that and today we actually moved the yen to buy,” he said, referring to the US bond market. State.

“We think the yen’s slide has gone too far too fast and we think we’ll hear something from policymakers soon.”

An uneasy calm in the market after a two-session selling storm suggests sentiment may be more widespread, or at least yen shorts are reluctant to add to their positions.

Positioning data shows that yen shorts have been reduced steadily since April.

“We’re not selling the yen anymore and we’re not long,” said Akshay Kamboj, co-chief investment officer at hedge fund Crawford Ventures.

“We’re just breathing and watching – whenever we see the right indicators, we’ll take action.”

Government officials toughened up verbal threats of intervention and issued their sternest warning yet on Thursday. Without action, however, the yen remained vulnerable at around 144 to the dollar.

“The big dollar/yen high of 1998 at 147.66 … is the natural target,” said Deutsche Bank strategist Alan Ruskin, adding that intervention risks would increase the closer it got. “It wouldn’t be surprising to see substantial yen long buying set in motion as it approaches.”

chart
Intervention risks start to scare long dollar/yen

MOMENTUM

The yen hasn’t been alone in falling lately, with the US dollar hitting multi-decade highs against the euro and sterling on a combination of risk aversion and expectations. in terms of interest rates.

But it has suffered the most because Japan is alone among the major economies in charging near-zero interest rates while the rest of the world scrambles to raise them to contain inflation.

After years of huge asset purchases that failed to push inflation to its 2% target, the Bank of Japan adopted yield curve control in 2016, where it guides interest rates short-term interest at -0.1% and the yield on 10-year bonds around 0%.

It drove cash from Japan into high-yield investments overseas and also attracted funds such as BlueBay who bet the policy won’t last – leaving the market subject to a violent response if policy changes. .

“There would be a very strong reaction to the BOJ’s policy response,” said Ed Al-Hussainy, senior currency and rates analyst at Columbia Threadneedle.

“A lot of these dynamic traders will step back and say, ‘That’s a very crowded view and if the Bank of Japan is fighting it, we don’t want to stay. “”

So far, other than misusing the currency, the BOJ has given no indication that it is considering a change. Former top currency diplomat Hiroshi Watanabe said Reuters intervention would be ineffective in countering dollar gains. Read more

Former BOJ board member Goushi Kataoka said Governor Haruhiko Kuroda is likely to maintain ultra-loose monetary policy for the rest of his term, ending in April. Read more

Analysts say stock market inflows are unlikely amid so much uncertainty surrounding the rate setting, but market participants say there are signs that outflows are slowing, following strong selling last week .

“There are signs that sales could decline,” said Dan Izzo, CEO of market-making firm GHCO. “Institutional flows into ETFs are gradually shifting towards better buys in developed markets excluding US commodities.”

And for money, there is always gravity.

“The US dollar won’t rise forever,” said Akira Takei, global bond fund manager at Asset Management One in Tokyo. “It’s too good to be true.”

chart

Join now for FREE unlimited access to Reuters.com

Reporting by Nell Mackenzie in London and Carolina Mandl in New York. Additional reporting by Alden Bentley and Ira Iosebashvili in New York, Summer Zhen in Hong Kong and Dhara Ranasinghe in London. Written by Megan Davies and Tom Westbrook; Editing by Kim Coghill

Our standards: The Thomson Reuters Trust Principles.