Investigation on the Yen Carry Trade

■ Since late August, the yen has continued to weaken against major currencies, and some speculative funds may be rebuilding their short positions.  

■ In addition to uncertainty in US politics, the overall market environment favors selling the yen, necessitating close attention to political developments in Japan. 
 
   This article will examine recent trends in the yen carry trade (selling the yen). 
From the end of August to September 26, the yen weakened against all major currencies, except for the New Zealand dollar (+0.3%). Among specific currency pairs, while the USD/JPY pair has not yet reached last year's high of 161.99, the EUR/JPY pair has approached its high of 175.42, and the CHF/JPY pair has even hit a new all-time high. 
According to data from the US Commodity Futures Trading Commission (CFTC) as of September 23, non-commercial yen positions, which reflect the movements of some speculative funds, showed a net position (long minus short) of approximately 79,000 contracts. While this is down from the peak of approximately 179,000 contracts in late April, it still demonstrates the resilience of yen buying. However, examining only the yen short positions, they have increased from about 23,000 in late April to about 96,000, indicating that, in addition to yen bulls who view dollar depreciation as likely, more market participants prefer to sell yen. 

 
   Generally, market conditions suitable for yen carry trades include: (1) high policy interest rate differentials, (2) declining volatility, and (3) increasing risk appetite. Considering the market environment since August, it can be said that these conditions are generally met, aside from the uncertainty surrounding US politics. Even after the US resumed interest rate cuts in September, the Japan-US policy interest rate differential remained in the high 3% range. At the same time, the currency options market shows that the one-month volatility of the US dollar against the yen rose to 15% since April when the US government adjusted its tariff policy, but has stabilized at a low level, between 8% and 9%, since mid-August. Additionally, major indices of the Japanese and US stock markets have generally hit record highs. Against this background, it is not surprising that some market participants have rebuilt their yen short positions. 

 
   However, compared with the first half of last year, this round of yen carry trades is notably less popular, which relates to domestic political trends in Japan. Since last fall, Japan's ruling coalition has lost its majority in both the House of Representatives and the House of Councilors after two parliamentary elections. Compared to the Liberal Democratic Party's (LDP) dominance since 2013, the risk of regime change has increased, which market participants interpret as heightened political risk. Suppose the LDP and Komeito join forces with other opposition parties to re-establish majorities in both houses. In that case, political risk will decrease, potentially further intensifying the yen sell-off, requiring careful attention.