Why has the yen returned to the 157-yen range even after speculative positions fell 72%?

[Financial News, Tokyo = Correspondent Seo Hye-jin] After joint U.S.-Japan intervention in the foreign exchange market, speculative yen short positions plunged 72% in just one week. That was the largest weekly drop since related statistics began in 1992. However, the yen briefly strengthened to the 155-per-dollar range immediately after the intervention, then slipped back to the 157-158 range, showing that the effect is fading quickly. Analysts say strong dollar demand from Japanese companies and distrust in fiscal and monetary policy are supporting the weak yen trend.
According to Nikkei, Inc. on the 9th, non-commercial yen positions in the Chicago currency futures market stood at a net short of 45,473 contracts as of the 4th, based on data compiled by the Commodity Futures Trading Commission (CFTC). That was down by 117,939 contracts, or 72%, from 163,412 contracts on the 28th of the previous month, just before the joint U.S.-Japan intervention. The weekly decline was the largest since October 1992, when comparable data became available.
The CFTC's non-commercial category includes leveraged funds such as hedge funds and asset management companies, so their net positions are used as an indicator of speculative investors' direction on the Japanese yen.
Before the intervention, the scale of net yen short positions had grown to a level comparable to 2007 and 2024, when the yen carry trade expanded. If such accumulated short positions are unwound all at once, buying pressure on the Japanese yen can surge and send its value sharply higher. That is why large yen short positions are sometimes called a "yen strong magma." In fact, the yen also rose rapidly in 2007 and 2024 as positions were liquidated.
This time, however, the pattern was different. Starting on the 30th of last month, the Japanese government and the BOJ stepped in with large-scale yen buying and dollar selling, and the United States also joined in by buying yen and selling euros. As a result, the USD/JPY exchange rate, which had approached 164 yen to the dollar, briefly fell to the low 155 range.
But on the 6th, the rate climbed back to the 158 range in the New York foreign exchange market, and it ended trading in the 157 range on the 7th. Even though speculative yen short positions were being unwound at a record pace, the yen's strength did not last long.
Market participants say strong dollar demand from Japanese companies is helping support the weak yen. Firms that import energy and raw materials continue to buy dollars and sell yen to make payments, offsetting the yen-buying effect from speculative position liquidation.
A loss of confidence in Japan's fiscal and monetary policy is also being cited as a factor. Masaya Sakuragawa, professor emeritus at Keio University, said, "Even as prices rise, the BOJ is raising rates slowly and fiscal expansion continues," adding, "There is a lack of consistency with macroeconomic logic."
Despite rising prices, the BOJ's rate hikes have been slow, leaving Japan's real interest rates in negative territory. When the government's draft economic growth strategy was released in June, concerns over weaker fiscal discipline also pushed up Japanese long-term yields sharply.
Takeshi Higashifukasawa, chief economist at Mizuho Research & Technologies, estimated the yen's fair value at around 162 per dollar, close to the level before the joint intervention. He said more than half of the roughly 50-yen decline in the currency since 2022 can be explained by rising expected inflation in Japan, and noted that "BOJ rate hikes have not kept pace with the rise in prices."
Even during past joint U.S.-Japan interventions, intervention alone was not enough to reverse the weak yen trend. In June 1998, the USD/JPY exchange rate was in the 146 range before the joint intervention, but it rose again to 147 yen in August that year. Naoki Iwami of GMX, who was in the foreign exchange market at the time, said, "Intervention alone cannot change the trend."
Attention in the market is now turning to the BOJ Monetary Policy Meeting in September. U.S. Secretary of the Treasury Scott Bessent also referred to the need for monetary policy measures to correct the yen's undervaluation, and said BOJ Governor Kazuo Ueda would "do what is necessary."
Iwami said, "The key question is whether the BOJ can raise rates in September and even accelerate the pace of hikes," adding, "If it cannot, the yen is likely to weaken again."
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