Recently, US Treasury Secretary Scott Bessent reiterated his determination to support the exchange rate of the Japanese Yen. At the same time, with the possibility of an interest rate hike by the Bank of Japan looming, the global market’s attention is drawn to the 23.4 trillion yen arbitrage trade.
According to a report by the Financial Times on September 9th, Bessent expressed his resolve in the capital markets not to underestimate his efforts to boost the Japanese Yen. He said, “I am the house now!”
Bessent stated, “When we intervene in the Yen, I am well aware of the movements of the Japanese government, the Bank of Japan, and Japanese decision-makers; if you want to bet against me, go ahead.” He added, “Every time someone says the Treasury Secretary is taking risks again, well, that’s exactly what I want, I have more information.”
Despite facing skepticism from investors, Bessent has embarked on unconventional actions to prevent the continued depreciation of the Yen, and the above statements represent his most candid stance on related measures. This former hedge fund leader from Wall Street recently led the US government’s first purchase of Yen in 30 years and announced plans to expand the repurchase of US government debt to curb rising long-term bond yields, taking the market by surprise.
On September 10th, the Yen strengthened against the US Dollar, reaching a high of 153.16 to 153.41 Yen per Dollar, marking the highest level in nearly 7 months (i.e., a 7-month low for the Dollar against the Yen).
Tadashi Matsukawa, bond investment manager at PineBridge Investments Japan Co., believes that Bessent’s remarks carry weight, but the idea of raising interest rates every few months is outdated and no longer applicable.
During the G20 Finance Ministers and Central Bank Governors Meeting, Bessent, in an interview with CNBC, stated, “I have information that the market has not yet received.”
He coordinated intervention actions with Japanese Finance Minister Okatsuki and made statements urging the Bank of Japan to raise interest rates.
The Bank of Japan is expected to raise interest rates by 25 basis points to 1.25% on September 18th, which has become a market consensus. The market is also beginning to reevaluate the ultimate interest rate. Nomura Securities expects the final rate to reach 1.75% to 2%, while Nippon Life Economic Research Institute forecasts a high of 2.25% to 2.5%; former Bank of Japan board member Hideyuki Adachi believes that there may be another rate hike in January next year.
A Reuters survey last month showed that out of 35 economists, the majority expect the Bank of Japan to raise rates to at least 1.5% by the end of March next year, with about 60% predicting a rise to at least 1.75% in the third quarter of 2027. The proportion choosing 1.75% as the final rate increased from 19% last month to 50%, and the proportion choosing 2% or higher rose from 23% to 36%. This indicates that a rate of 1.25% may not necessarily be the end point of this round of rate hikes.
Meanwhile, the market is starting to focus on whether the long-standing “Yen carry trade,” which has supported global financial markets for years, is coming to an end.
The so-called carry trade involves borrowing low-interest currencies such as the Yen, converting them into US Dollars or other emerging market currencies, and investing in local bonds and other financial assets. After the trade is closed, investors convert the returns back into Yen and repay the loans, earning the difference in interest rates between the two countries; if the Yen depreciates during the period, they also gain additional exchange rate profits.
The Yen has long been the most popular funding currency. Currently, the annual return rate for USD/Yen carry trades is usually around 2.5% to 3.5%, mainly driven by the interest rate differential between the US and Japan, which is lower than the 5% to 6% seen in 2024.
Data from the US Commodity Futures Trading Commission (CFTC) shows that as of the week ending September 1st, net short positions in the Yen increased to 92,227 contracts, rising for the third consecutive week, but still lower than the two-year high of 163,412 contracts set in the week ending July 1st. Due to widespread use of leverage, actual exposure may be much higher than the scale shown in the futures data.
An analysis article released by Reuters on September 9th suggests that with an impending interest rate hike by the Bank of Japan, further policy tightening may be necessary in the future, allowing the market time to adjust its positions. The Yen’s recent appreciation trend has also been relatively orderly, with the stock market having largely absorbed the rate hike signals. This implies that the Yen carry trade may gradually fade out, rather than collapsing suddenly as it did in 2024.