BNY’s Geoff Yu notes that iFlow data show clients turning underweight Japanese Yen (JPY) for the first time since Q4 2024, as USD/JPY’s climb and intervention fears had kept hedge ratios low. Despite recent official action, markets now doubt authorities’ ability to defend the currency, while fading Bank of Japan (BoJ) tightening expectations and a more hawkish Federal Reserve backdrop support selective rebuilding of JPY-funded carry positions.

Yen flows and shifting carry dynamics

"iFlow data show that cross-border clients are now underweighting JPY on an aggregate basis for the first time since Q4 2024. As USD/JPY climbed, fears of official intervention kept hedge ratios unusually low, with many investors willing to absorb carry costs given the yen’s perceived undervaluation and expectations of Fed easing. That backdrop has now changed."

"Despite repeated intervention, markets are increasingly questioning the Ministry of Finance’s willingness and ability to defend the currency. At the same time, expectations of further BoJ tightening have faded just as markets have repriced the Fed toward a more hawkish path."

"While underweight USD/JPY positions are beginning to normalize, our data suggest the pair remains modestly underheld. The broader decline in aggregate JPY positioning has instead been driven by renewed demand for JPY-funded crosses, signaling that investors are once again rebuilding carry exposure."

"This supports our view that the near-term environment favors higher-yielding currencies after a difficult quarter. However, we expect the carry recovery to be more selective than in 2024, when aggressive Fed easing fueled a much larger expansion in JPY-funded cross-positions. Today’s policy backdrop is fundamentally different."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)