Hedge funds are heavily betting that the Japanese yen will depreciate, pushing over $1.1 billion into short positions right before Japan's upcoming Senate election on Sunday, according to Bloomberg.
More than 12,606 futures and options contracts have been opened to bet on the yen's weakness, marking the first negative position since March.
MAIN CONTENT
Hedge funds are focusing on shorting the yen before the Senate election, concerned about unstable fiscal policies.
Japanese government bonds are under pressure as yields hit their highest levels since 2008.
The options market indicates a trend of continued yen weakness in the short term, with negative investor sentiment.
Why are hedge funds rushing to short the yen before the Japanese election?
This is the first time since March that a negative position on the yen has been recorded in the futures and options market, reflecting expert views from top financial strategists.
The Senate election this weekend will determine the fate of Prime Minister Shigeru Ishiba's Liberal Democratic Party (LDP), which currently holds a majority but only a minority in the House of Representatives. If the LDP loses more seats, fiscal policy could become unstable, prompting investors to seek protection by betting on a depreciation of the yen.
Expert opinions on political and financial impacts
"The LDP's defeat could pave the way for expanded fiscal spending with proposals to cut consumption taxes, leading to increased budget deficits and strong pressure on long-term bond yields," Aroop Chatterjee, a currency strategist at Wells Fargo, emphasized on July 18, 2025, according to Bloomberg.
Aroop Chatterjee, Wells Fargo currency strategist, 2025, Bloomberg
MUFG's strategist group also recommended shorting the yen before the election, aligning with the nearly 3% decline of the yen in July against a 10% gain in the first half of the year. This reversal is related to market sentiment as the USD recovers globally.
How does a sharp rise in bond yields affect the yen?
Volatility in the bond market has increased downward pressure on the yen as the yield on Japan's 10-year government bond has just reached 1.6%, the highest since 2008.
Jayati Bharadwaj and Alex Loo from TD Securities stated that the yen's long positions have become overstretched and vulnerable, forecasting continued short-term pressure on the yen.
Long-term bond yields at record levels
The yields on 20- and 30-year bonds have also reached their highest levels since 1999, reflecting fiscal instability due to potential policy changes post-election. This raises capital costs, diminishing the yen's appeal as a traditional safe haven currency.
How does the options market react to heightened risks?
Data from the Chicago Mercantile Exchange shows that investors are sharply increasing their purchases of USD call options on the USD/JPY currency pair, indicating expectations for continued yen weakness.
This is a clear sign of the market direction as short-term options contracts also turned negative on the yen for the first time in nearly a year.
Implications from investor sentiment and electoral policies
The LDP is trying to solidify support with its cash distribution policy, while the opposition wants to reduce consumption tax, both of which could significantly increase the budget deficit.
"Market sentiment has turned negative towards the yen due to concerns about economic instability and post-election fiscal policies," Omori, an analyst at Mizuho Securities, noted in July 2025.
Omori, Mizuho Securities analyst, 2025
Is there any outlook for the yen in the current context?
Although a favorable election outcome for the LDP could help the yen rise back around 144 yen to one USD, most experts do not expect this.
Additionally, the trade negotiations between the US and Japan regarding tariffs are ongoing without a clear outcome, adding further uncertainty to the yen.
Frequently Asked Questions
1. Why are hedge funds focusing on shorting the yen before the election?
They predict fiscal policy instability if the LDP loses control, increasing the budget deficit and downward pressure on the yen.
2. How do rising bond yields affect the Japanese yen?
High yields increase capital costs, making the yen lose its allure as a safe-haven currency, causing downward pressure.
3. What is the current market sentiment regarding the yen?
Investors have shifted to expecting a weaker yen, as evidenced by increased purchases of USD options and sales of yen options.
4. Can the yen recover after the election?
Only if the LDP maintains a majority does the yen have a chance to strengthen, but this probability is low according to experts.
5. What external factors influence the yen?
US-Japan trade negotiations and global economic developments are key factors influencing the yen.
Source: https://tintucbitcoin.com/hedge-funds-ban-khong-dong-yen-nhat/
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