Traders place record bet on rising Japanese yen, eyeing further rate hikes

By Harry Robertson

LONDON (Reuters) - Speculators have mounted their biggest ever wager that the Japanese yen will continue to rise as they position for further Bank of Japan interest rate hikes, an abrupt reversal from huge bets against the currency last year.

The yen has strengthened by 4% this year as stronger inflation data has pointed to more rate hikes, calling into question the once hugely popular yen carry trade, which drove investors to position heavily against the currency over the last two years.

Net long positions in yen futures among non-commercial traders - such as hedge funds and other speculators - soared to 96,000 contracts in the week ended February 25. That was up from 61,000 a week earlier, data from the U.S. Commodity Futures Trading Commission showed on Friday, and was a record on data stretching back more than 30 years.

In cash terms, the long position - a bet the currency will rise - amounts to around $8 billion, LSEG data shows.

The yen rose to an almost five-month high of 148.56 per dollar last week as a fall in U.S. Treasury yields and a rise in Japanese bond yields dented the attractiveness of the U.S. currency.

Growing expectations that the Bank of Japan will keep hiking interest rates have been boosted by stronger-than-expected inflation data and comments from BOJ officials.

"The BOJ has definitely been more hawkish than people had anticipated at the start this year, hiking rates again and strongly signaling that they're likely to continue to hike rates going forward," said Lee Hardman, senior currency analyst at Japanese bank MUFG.

The BOJ has been going in the opposite direction to other major central banks, hiking interest rates to a 17-year high of 0.5% in January. Rates were negative for eight years until 2024 as Japan battled low growth and deflation.

Speculators built their biggest bet against the Japanese currency in 17 years last July, as U.S. bond yields soared compared to those in Japan.

The difference in yields made it highly profitable to borrow in Japanese yen to invest in dollar assets, in a so-called carry trade, effectively shorting the currency.

Hardman said higher volatility, along with a rising yen and Japanese yields have made such a trade less attractive. "The yen is still a low-yielder, but it's more risky now to go short the yen," he said.

Analysts at JPMorgan said in a note that the yen rally was part of a "broader carry-to-value rotation" in currency markets.

However, Kamal Sharma, senior FX strategist at Bank of America, said he expects the yen's gains to be limited and for it to fall back to around 160 per dollar, in part because of foreign direct investment outflows.

"We're still bearish on the yen, and a large part of this has been the idea that the structural outflow that we've seen from the Japanese economy continues at pace," he said.

(Reporting by Harry Robertson; Editing by Christina Fincher)