Ueda Kazuo's “Hawk Voice” is difficult to reverse the decline, and the Japanese yen bears are still holding their ground

The Zhitong Finance App learned that the market is increasingly speculating that the Bank of Japan will raise interest rates this month, but participants are still betting that the yen will continue to weaken against the US dollar.

Bank of America, Nomura Holdings, and Royal Bank of Canada capital market traders said that investors' position layouts reflect such bets. Citigroup's yen “pain index”, an indicator that measures traders' overall positions, is still far below zero, which indicates that the market's pessimism about this currency persists.

Even after Bank of Japan Governor Kazuo Ueda hinted that interest rates might be raised soon, and the central bank is allegedly ready to act in December (unless the economy or financial markets experience a major shock), investors are sticking to bearish bets. The logic is that even if the Bank of Japan may act, Japan's yield is expected to be significantly lower than that of the US, which will support the dollar.

“The position layout still tends to gradually rise against the dollar against the yen before the end of the year. Unless the Bank of Japan has a real surprise impact, this trend will be difficult to reverse,” said Ivan Stamenovic (Hong Kong), head of currency trading at Bank of America Asia Pacific G-10. He pointed out that Ueda's hawkish remarks sparked discussions about the currency pair, but there was no substantial shift in market sentiment.

If the yen weakens further, the impact could be quite significant, as it will push up import costs, thereby exacerbating already high inflation. This could also complicate Prime Minister Takaichi Sanae's plans to mitigate the impact of the cost of living crisis on families.

Japan's Finance Minister Satsuki Katayama (Satsuki Katayama) has been trying to contain the weak trend of the yen, but the results have been limited. The reason for the trend of the yen is partly due to speculation about the delay in the Bank of Japan's interest rate hike, which has contributed to this weakness. Even though the yen rose this month after Ueda sent the clearest signal so far that interest rate hikes were imminent, the increase was only moderate.

Nomura senior foreign exchange options trader Sagar Sambrani said that the position layout of the yen reflects investors' views that although inflation is still far higher than the Bank of Japan's target, Japan's monetary policy still seems dovish in the medium to long term.

He pointed out that after Ueda's comments, hedge funds' positions betting on a rise in USD/JPY have gradually been reduced, but “most funds still hold this position.” Rob Turner, director of electronic foreign exchange trading at the Royal Bank of Canada Capital Markets, believes that “speculative positions” are biased towards the rise of the US dollar against the yen, but at the same time noticed a slight cancellation of this position since late November.

The options market is also showing a similar trend. According to the Chicago Mercantile Exchange, the day after Ueda's speech, USD/JPY's call options (which profit when the pair rises) traded about 40% higher than put options (which profit when the pair falls).

Looking ahead, Japan's labor cash income data due to be released on Monday may provide clues as to whether the pace of wage growth supports the Bank of Japan's reason for raising interest rates in December. The current probability that the swap market will raise interest rates by 25 basis points in December is about 91%, up from 58% at the end of November.

Despite rising market expectations for the December rate hike, the general consensus favors a weakening of the yen.

UBS Group lowered its year-end yen exchange rate forecast from 152 yen to 158 yen per dollar, while Bank of America expects the yen to fall below the 160 yen mark by early 2026. The yen closed at 155.33 yen to the dollar last Friday.