The yen is approaching 160 again, and UBS warns: After the short sellers are "washed out," the short-selling window will reopen.

The yen remains under pressure, reigniting the risk of intervention, while subtle changes in market structure are setting the stage for a new round of short-selling offensives.

The US dollar rose sharply against the Japanese yen after the Japanese holiday, climbing above 158 and just shy of the 160 mark . The Bank of Japan raised interest rates by 25 basis points last Friday, but Governor Kazuo Ueda's subsequent remarks failed to meet market expectations for further tightening , causing the yen to fall instead of rise, with a significant cumulative decline over two weeks.

Meanwhile, the yield on Japan's 10-year government bonds jumped 10 basis points to 3.075% on Thursday, a new high since 1996, as a global bond market sell-off combined with domestic fiscal pressures further exacerbated market volatility.

A key shift in hedge fund positions has emerged : According to the latest CFTC data, as of the week ending September 15, hedge funds turned net long on the yen for the first time in seven months, holding approximately 251 billion yen (about $1.6 billion) in bullish yen positions. UBS strategists pointed out that speculative yen short positions have been "completely wiped out," which has created space for the market to rebuild bearish positions.

The core contradiction currently facing the market lies in three factors: the uncertainty surrounding the Bank of Japan's interest rate hike path, the expectation of a continued hawkish policy stance from the Federal Reserve, and the upward pressure on long-term interest rates brought about by Japan's fiscal expansion. These three factors are collectively suppressing the yen, and the deterrent effect of intervention is gradually being digested by the market. Bessant's commitment to a "strong yen" will face a real stress test at the 160 level.

Interest rate hikes failed to rescue the yen, and the 160 level has once again become the focus.

The Bank of Japan decided to raise interest rates by 25 basis points at its policy meeting on September 18, but this move failed to stop the yen's decline. Kazuo Ueda's post-meeting remarks were interpreted by the market as dovish, failing to provide sufficiently clear guidance on the subsequent tightening path, causing the yen to continue weakening after the rate hike, with the USD/JPY exchange rate briefly rising above 158.

It is worth noting that the decision to raise interest rates was not unanimously approved; two members voted against it, and no member proposed a motion to raise rates by 50 basis points.

Matthew Ryan, head of strategy at Ebury Partners, pointed out, "If the market lacks confidence in further tightening by the Bank of Japan, the yen still faces the risk of further weakening in the short term. Foreign exchange intervention is essentially a blunt instrument, and without strong monetary policy support, the Japanese authorities will find it difficult to curb the yen sell-off."

Japanese bond yields surge to near 30-year highs as domestic and international pressures combine.

The Japanese market was hit hard as soon as it reopened after the holiday. The yield on Japan's 10-year government bond jumped 10 basis points to 3.075% on Thursday, the highest level since 1996; the 5-year yield rose 9.5 basis points to 2.37%, and the yield curve rose across the board.

External pressures came from the United States: strong economic data and a weak Treasury auction pushed U.S. Treasury yields to near two-decade highs, rising oil prices further strengthened inflation expectations, and the market became increasingly aggressive in pricing in continued interest rate hikes by the Federal Reserve.

Domestically, fiscal pressures are equally significant. Reports indicate that the Japanese government is considering raising its medium-term defense spending target to 3.5% of GDP, aligning with NATO and other US allies. This potential expansion plan has intensified market scrutiny of Prime Minister Sanae Takaichi's fiscal strategy, putting considerable pressure on long-term government bonds.

The short sellers have finished their "shuffling," and a new window for short selling may have opened.

CFTC positioning data reveals an intriguing shift in market structure: as of the week ending September 15, hedge funds’ net positions in the Japanese yen turned from short to long, the first time since July 2025 , with a net long position of approximately 251 billion yen.

However, UBS strategist Shahab Jalinoos' team offered a completely different interpretation—this is not a bullish signal, but rather the result of short covering. They pointed out that speculative yen shorts have been "completely wiped out," and with the carry trade environment still favorable and the USD/JPY interest rate differential still significant, this precisely creates conditions for investors to rebuild short positions.

In other words, the emergence of net long positions may not be the starting point of a yen reversal, but rather the prelude to a new round of short selling . Carol Kong, a currency strategist at the Commonwealth Bank of Australia, stated, "If US Treasury yields continue to rise and the market continues to test the Japanese authorities' resolve to defend the yen, the USD/JPY exchange rate could soon break through 160."

Intervention thresholds and the Bessant commitment: Can joint action be replicated?

The symbolic significance of the 160 level goes far beyond the technical aspects. Ray Attrill, head of foreign exchange strategy at National Australia Bank, said, "It is entirely possible that we will return to 160, but I expect the threat of intervention itself will prevent the exchange rate from actually breaking through this level."

However, whether the intervention can have a lasting effect largely depends on Washington's involvement. Attrill points out that historically, unilateral intervention by Japan has rarely resulted in a sustained reversal when monetary policy fundamentals are unfavorable, and the market may quickly digest the impact of another unilateral operation.

This summer, the US and Japan jointly bought yen, significantly increasing the risk cost of shorting the yen. Treasury Secretary Bessant has repeatedly expressed public support for a stronger yen, effectively challenging traders. Once the dollar/yen exchange rate returns to 160, Bessant's credibility will be directly tested.

Attrill added that further US intervention might come with conditions—Japan would need to demonstrate a willingness to raise interest rates faster and more significantly than the market currently expects. Katayama Satsuki had previously confirmed that the framework for joint US-Japan intervention remains valid, but the US Treasury's actual tolerance threshold and the triggering conditions for joint action remain the biggest uncertainties for the market.

Analysts believe that the effectiveness of rate checks has proven to be short-lived and limited, leading to increased market skepticism regarding unilateral intervention by Japanese authorities. Against this backdrop, the options market is subtly shifting its pricing of intervention risk around the 160 level.

Carol Kong points out that a rapid break above 160 for the USD/JPY exchange rate would "substantially increase the likelihood of official action," especially given recent precedents of exchange rate checks and historical precedents of coordinated intervention. A rapid breach of 160 could trigger a repricing of risk reversal in the options market, thereby amplifying exchange rate volatility.

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