The Bank of Japan is suspected of intervening in the market, causing hedge funds to withdraw from the short camp on a large scale, which is rare in over a decade

According to the VESYNC APP, shortly after the release of the Consumer Price Index (CPI) report in the United States, the Japanese yen saw a strong rebound against the US dollar, surging to the key level of 157.44 yen per US dollar, achieving the largest single-day increase since the end of 2022, with an increase of nearly 3%. Market participants speculated that the Japanese government and the Bank of Japan may have intervened in the market by buying yen and selling dollars based on the fund flow data released by the Bank of Japan to support the value of the yen. This intervention seemed to have an immediate effect, as hedge funds reduced their short positions on the yen at an unprecedented speed. Data from the Commodity Futures Trading Commission (CFTC) revealed this: in the week ending July 16, leveraged funds reduced their net short yen contracts by 38,025 contracts, the largest reduction since March 2011.

Although hedge funds still maintain a bearish outlook, selling a net of 76,588 contracts, this shift coincided with an improvement in market sentiment towards the yen. Last week, the yen rose to its highest level since early June against the US dollar. Amid turbulent trading weeks, hedge funds withdrew one after another. It is estimated that Japan injected 5.64 trillion yen (approximately $358 billion) into the market in two trading days, boosting the yen from its lowest level since the 1980s.

Yukio Ishizuki, Senior Foreign Exchange Market Strategist at Daiwa Securities in Tokyo, stated, "Demand for selling the yen has decreased after Japan took a series of intervention measures." He predicted, "The trend of closing out short yen positions seems likely to dominate until the Bank of Japan announces its policy decision on July 31."

The recent rise in the yen also reflects the market's firm bet on a rate cut by the Federal Reserve in September, as well as support for Donald Trump's criticism of the yen's weakness. The next major test for traders will be at the end of the month when both the Federal Reserve and the Bank of Japan will announce their policy decisions. Any dovish hints from the Bank of Japan could be used as a reason to resume shorting the yen.

According to data from the Commodity Futures Trading Commission, asset management companies have also reduced their short yen positions by the largest amount in a year. As of the time of writing, the yen against the US dollar remains relatively stable at 157.57.

With consumer prices in Japan accelerating for the second consecutive month in June, the reasons for policymakers to raise interest rates again are becoming increasingly compelling. A Bloomberg survey last month showed that about one-third of Bank of Japan watchers expect borrowing costs to rise on July 31.

Krishna Bhimavarapu, Asia-Pacific economist at Invesco Global Investment Management, wrote in a report, "We expect the Bank of Japan to raise interest rates in July, which could add some much-needed sustainability to the yen ”