Has the prologue for the correction of the yen's depreciation trend just kicked off?

"This market movement may become a turning point to correct the yen's depreciation," market participants say. Although the trend direction is different from this time, memories of the 2012 exchange rate shift from ultra-strong yen appreciation to yen depreciation also come to mind. Drawing lessons from the 2012 experience, how far can this round of yen depreciation correction rally go?……

The yen rose by about 8 yen against the U.S. dollar in less than a week. Market participants who switched to buying the yen sensed behind U.S. Treasury Secretary Bessent's remarks on curbing yen depreciation that the Bank of Japan (the central bank) may speed up interest rate hikes, and signs of changes in the flow of pension funds. Although the trend direction is different from this time, memories of the 2012 exchange rate shift from ultra-strong yen appreciation to yen depreciation also come to mind.

"With the Bank of Japan accelerating interest rate hikes and other measures, the policies that led to the historic yen depreciation are likely to change," said Naoki Iwami, who used to be a foreign exchange trader and hedge fund manager for a long time and now serves as the president of asset management firm GMX. He closed his previous short yen position in early September and switched to buying the yen.

The turning point came from the G20 Meeting of Finance Ministers and Central Bank Governors that concluded on September 1. News came out that Bessent stated: "In response to the situation where the yen is significantly undervalued, I strongly support Japan in taking resolute market and financial policy measures," thus demanding that Japan strictly abide by fiscal discipline and push forward interest rate hikes.

The yen exchange rate against the U.S. dollar, which was originally in the range of 160 yen to 1 U.S. dollar, began to change on September 2. The market generally believes that hedge funds took the lead, and then trend-following CTA (Commodity Trading Advisor) funds further amplified the market movement. Naoki Iwami said: "The weight of Bessent's remarks cannot be underestimated."

The market is not simply afraid of Bessent.

Yuji Saito, Executive Advisor of SBI FX Trade, pointed out: "Exchange rate movements often start to change before policies are actually implemented." This reminds him of the situation in 2012 when the exchange rate shifted from the ultra-strong yen appreciation phase at the 70 yen per U.S. dollar range to yen depreciation.

At that time, Yuji Saito worked at Credit Agricole Corporate and Investment Bank. As a trader, he was also responsible for communicating with the monetary authorities. Although the Bank of Japan essentially introduced a price target in February of the same year, the wave of "safe-haven yen buying" triggered by the European financial turmoil prolonged the yen appreciation situation.

The turning point in Yuji Saito's memory was the annual meeting of the International Monetary Fund (IMF) and the World Bank held in Tokyo in October 2012. At this event where overseas dignitaries gathered, then Japanese Vice Minister of Finance for International Affairs Takeshi Nakao frequently sent signals to correct yen appreciation such as "verbal intervention".

Then came November 14 of that year. Then Japanese Prime Minister Yoshihiko Noda and President of the Liberal Democratic Party Shinzo Abe held a party leader debate, and the dissolution of the House of Representatives was a foregone conclusion. On that very day, Saito met with a person from the Japanese monetary authority, who told him: "The 70-yen range is coming to an end." Just as the official said, the yen exchange rate left the 70-yen range and continued to fall after November 14. Before Bank of Japan Governor Haruhiko Kuroda launched the extraordinary easing policy in April 2013, the exchange rate approached 100 yen all the way.

Sensitive hedge funds began to adjust their positions as early as about half a year before the policy shift.

Data from the U.S. Commodity Futures Trading Commission (CFTC) shows that "leveraged funds", including hedge funds, have continued to expand their yen short positions since around October 2012, when Japanese authorities stepped up policy communication. It is said that Bessent himself also profited from this wave of yen depreciation movement back then.

This time, it can be said that the market has sensed the upcoming changes in policies and capital flows behind Bessent's remarks and rushed to make layouts. In 2012, the yen was excessively appreciated, while in 2026, it is the yen that depreciates. Although the trend directions are different, Saito believes: "Both sides show concerns about the long-term imbalance of the exchange rate. This market movement may become a turning point to correct the yen's depreciation."

Previously, the market generally expected the Bank of Japan to raise interest rates about once every six months. Now more and more views believe that the pace of interest rate hikes will be accelerated to once every three months. Some views also hold that the policy rate may eventually exceed 2%.

Led by foreign-funded institutions, market expectations that the Government Pension Investment Fund (GPIF) of Japan will increase its holdings of yen-denominated assets are also heating up. Ugo Ranieri, who is in charge of currency strategy at U.S. asset management firm Neuberger Berman, pointed out: "Events such as the asset allocation adjustment in 2013 once had a huge impact on the exchange rate." He believes: "This matter is still underestimated at present, and this time it will also become a powerful means (to reverse the trend of the market movement)."

So, how far can this round of yen depreciation correction rally go?

Masakazu Takada, a quantitative strategist at JPMorgan Securities, estimated that if CTA funds close all their yen short positions, the yen appreciation and dollar depreciation movement will advance to around 148 yen per U.S. dollar, which is roughly equivalent to the exchange rate level on the eve of Sanae Takaichi's election as president of the Liberal Democratic Party in October 2025.

Calculating the yen-dollar position through CTA's trading performance and other data, the current score representing the size of yen short positions is about 0.4, which has fallen from the peak of 1.2 in July, but there is still room for further reduction.

Bessent's remarks to curb yen depreciation are continuing. On September 8, he even said: "I have asymmetric information (that the market does not have). Now I am the market maker."

A senior market participant said: "Whenever the market reaches a key node, Bessent will step up. It is best not to go against him." Judging from the 2012 experience, the correction rally of yen depreciation may have just kicked off.

This article is from the WeChat Official Account "Nikkei Chinese Network" (ID: rijingzhongwenwang), written by Nao Sabe, and released with authorization from 36Kr.