BOJ Hints at Policy Shift, Prompting Uncertainty for Yen Carry Trades

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The Bank of Japan’s indication of a potential policy shift is casting uncertainty over one of the most favored trades in foreign-exchange markets – the yen carry trade. The concept of borrowing yen to purchase higher-yielding currencies is now facing challenges following comments by BOJ’s Hajime Takata, suggesting a possible alteration in policy. This development is causing hesitation among money managers, particularly as leveraged funds have escalated their wagers against the yen to the highest levels in over six years.
Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, highlighted the significance of the BOJ’s initial move and its signaling effect, emphasizing the potential for a rapid unwinding of positions in the event of a negative shock.
As speculation mounts regarding a potential BOJ policy adjustment, there’s a corresponding increase in the likelihood of yen appreciation. Takata’s assertion that Japan’s price target was within reach spurred a notable surge in the currency. The yen saw a nearly 1% climb to ¥149.21 against the U.S. dollar, marking its strongest level in over two weeks.
The recent gains in the yen underscore the risks inherent in carry trading and betting against the yen. Abrupt exits from short positions by investors could exacerbate a significant upward movement in the yen.
Data from the Commodity Futures Trading Commission indicates that leveraged funds are currently the most pessimistic on the yen since early 2018.
Peter Vassallo, a portfolio manager at BNP Asset Management, expressed concerns about the potential repercussions of unwinding positions, highlighting the left-tail risk associated with such actions.
For carry traders, navigating this landscape requires careful consideration. While the BOJ’s stance on raising its policy rate remains uncertain, the yen’s underperformance against other currencies and prevailing interest rate differentials continue to influence investment decisions.
Kit Juckes, Chief FX Strategist at Societe Generale, anticipates a shift in money manager positioning in response to the escalating debate surrounding a BOJ policy change.
Looking ahead, BOJ policymakers are set to convene on March 18 for a two-day meeting, where the trajectory of future policy will be outlined. However, a significant change at this meeting may be premature, according to Tom Fitzpatrick, Managing Director of Global Markets Insights at R.J. O’Brien & Associates.
Ultimately, sustained yen appreciation against the dollar will hinge on a narrowing gap between BOJ and U.S. Federal Reserve policies, which may necessitate Fed rate reductions alongside a shift in Japanese policy, as outlined by Lee Hardman, Foreign-Exchange Strategist at MUFG.