Intervention concerns fade as hedge funds resume "short yen" trades.

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As Japan faces a key election this weekend, hedge funds are restarting their bets on shorting the yen, anticipating the currency will weaken again.

Prime Minister Sanae Takaichi emphasized the benefits of a weak currency ahead of the February 8 vote, putting the USD/JPY exchange rate back in the market spotlight. She called the snap election to consolidate her leadership, and polls show her party is likely to win a majority of seats alone—a result that could give her greater room to pursue fiscal stimulus and further increase Japan’s already heavy debt burden.

The options market is reflecting this shift. According to Bloomberg on Wednesday, citing Depository Trust & Clearing Corporation data, on Tuesday, trading volume in USD/JPY call options worth $100 million or more exceeded that of put options of the same size. As demand for call options picks up, the premium to hedge downside risks in USD/JPY over upside risks for the next month has dropped to its lowest level in nearly two weeks.

This marks a significant turnaround in market sentiment. Previously, following the January 23 inquiry by the New York Fed and subsequent comments from President Trump, the yen saw a strong rebound. But after Treasury Secretary Besant reiterated the strong dollar policy and Walsh was nominated as the next Fed Chair, pressure on the yen quickly resumed.

Traders Return to the “Takaichi Trade”

Antony Foster, Head of G-10 Spot Trading at Nomura International in London, said:

Now that the market has somewhat stabilized and the extreme bubble in the precious metals market has subsided, hedge funds are increasingly returning to carry trades and the Takaichi trade. Japan’s election will take place this weekend, and the market expects USD/JPY to rise to higher levels, especially in the case of a landslide victory for Takaichi.

The yen has been steadily sliding since Takaichi won the LDP leadership last October, touching an 18-month low against the dollar last month. It has now bounced back to 156.2.

Takaichi’s latest remarks have further fueled bullish sentiment on USD/JPY. Mukund Daga, Global Head of FX Options at Barclays, pointed out:

Last weekend’s comments about yen weakness being beneficial to exporters seem to have reignited market interest in buying USD/JPY.

In contrast, real money investors such as asset management firms have taken a more cautious stance amid recent volatility, waiting for clearer signals on the next direction for the currency pair. Ivan Stamenovic, Head of G-10 Currency Trading for Asia-Pacific at Bank of America, said: “Real money is basically on the sidelines, using options for protection rather than making a clear directional commitment on USD/JPY.”

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