Japanese Yen Exchange Rate: The Yen’s Appreciation Trend Since September 2nd

■ The USD/JPY exchange rate fell in early September, presumably mainly due to speculative funds unwinding short yen positions accumulated since August.  
■ Considering the trend in the summer of 2024 and the schedule for September this year, speculative funds may further cover their yen short positions. 
 
As of this writing, the USD/JPY exchange rate has declined from a high of 160.39 yen on September 2nd to a low of 153.13 yen on September 8th, a drop of about 7 yen. Although this decline exceeds the magnitude of the yen intervention implemented in late April this year, we speculate that the main reason for this yen appreciation is the unwinding of short yen positions by speculative funds. We refer to data from the U.S. Commodity Futures Trading Commission (CFTC) to assess the holdings of "leveraged funds," which are mainly speculative. Currently, the net position (long yen - short yen) remains short yen. The highest value this year was approximately 115,000 contracts at the close of trading on June 30th (USD/JPY closing price: 162.54 yen). However, after actual currency intervention in late July, it decreased to approximately 53,000 contracts. In the latest data—as of the close of trading on September 1st (USD/JPY closing price: 160.17 yen)—speculative funds have rapidly increased their short yen positions again to approximately 102,000 contracts. We believe that these short-term positions began to be unwound, influenced by statements from Bank of Japan policymakers and market expectations regarding adjustments to the Government Pension Investment Fund of Japan's (GPIF) asset allocation, and that this unwinding became the main reason for the yen's appreciation in early September. 
 
Furthermore, even considering the unwinding of existing positions, we believe that the unwinding of currency hedging related to investments in Japanese stocks by overseas investors is the reason why the likelihood of this yen appreciation is lower. This point was already discussed in the PRESTIA Insight* report released on August 26th. Last week, the TOPIX (Topix Stock Index) fell by a maximum of about 3.0%, and last week's low (4070.64) is still some distance from the July low (3859.13). Therefore, the capital outflow caused by overseas investors withdrawing funds from the Japanese stock market still needs to be monitored, but at present, we believe that this situation has not yet reached a large scale. If we compare the trend of USD/JPY falling from about 162 yen to below 140 yen from early July to mid-September 2024 with the recent USD/JPY decline of about 7 yen, we believe that speculative funds still have considerable room for short covering of yen. 
 
In the summer of 2024, influenced by factors such as the sudden rise in expectations of a US interest rate cut and the weakening of the US dollar, speculative funds held a peak of about 110,000 short yen contracts; by the close of trading on October 15 of the same year, this position had turned into about 10,000 long yen contracts. Following the Bank of Japan's monetary policy meeting on September 18th next week, Japan will enjoy a long holiday until the 23rd. Since 2022, Japan has frequently chosen to intervene in the yen's exchange rate during Japanese holidays. Therefore, given market caution regarding potential further intervention, speculative funds may find it difficult to launch another yen sell-off. While this is not our primary scenario, we should remain vigilant for further yen appreciation until late September.