Another Trump 2.0 era tragedy! The largest yen long position in nearly 40 years collapses

Investors once bet a record amount of funds on the appreciation of the yen, hoping to profit from Japan's long-awaited economic recovery while also betting on a slowdown in the US economy. However, the reality has become a cautionary tale from the Trump era.

The yen has fallen to its lowest point in nine months, and speculators are withdrawing from their largest long positions on the currency in nearly 40 years.

There are two reasons for their miscalculation: First, the US economy has shown unexpected resilience to trade shocks, and policymakers have become less inclined to further rate cuts; second, Japan's new government is more inclined to let the central bank slow down rate hikes.

The collapse of this popular bet highlights how the market has completely defied expectations in the first 11 months of President Trump's second term.

This also shows how stubborn the weakness of the yen is—a costly misjudgment for investors, as holding the almost non-yielding yen means giving up returns that could be obtained from other investments.

"The market had generally expected US and Japanese interest rates to converge, but the process may not have progressed as smoothly as anticipated." Bart Wakabayashi, manager at State Street's Tokyo branch, said that over the past seven months, the bank's clients have shifted their bullish bets on the yen to a completely neutral stance.

This week, when the USD/JPY exchange rate hit a nine-month high above 155 yen, Japanese officials hinted at intervention, but most in the market believe that this currency, which has been under pressure for nearly five consecutive years, may move sideways or continue to weaken.

"We are currently taking a wait-and-see approach... but we lean toward further yen weakness," said Vaibhav Loomba, head of FX and rates at Singapore financial services firm Klay Group. "There is currently a lack of clear trading direction in the market."

Sanae Takaichi - The Trump Factor

The weakness of the yen is largely related to the Bank of Japan's cautious attitude toward rate hikes, which is partly a response to the uncertainty caused by US tariff policies.

Recently, Sanae Takaichi, who took office as Prime Minister at the end of October, has further increased political pressure—her government, while ramping up spending to boost growth, is more inclined to maintain low interest rates.

"Although her room for maneuver is very limited, the overall direction is undoubtedly negative for the yen," said James Athey, fixed income portfolio manager at Marlborough. "Meanwhile, the Bank of Japan remains stuck, constrained by fear and historical precedent."

Japan has been battling deflation for decades and carried out its first rate hike in 17 years in 2024, but the policy rate was only raised to 0.5% to prevent the economic recovery from stalling.

Currently, the market has simultaneously lowered its bets on future US rate cuts and Japanese rate hikes, resulting in the policy rate differential between the two countries remaining above 300 basis points, putting the yen at further risk of depreciation.

"We actually believe that USD/JPY could go even higher," said Chandresh Jain, Asia emerging markets rates and FX strategist at BNP Paribas, who is betting via options that the yen will fall below the 155 level in the coming weeks.

Carry Trade

Due to the US government shutdown, which interrupted the collection of position data since September, it is currently unclear whether the market has turned net short on the yen, but the overall trend is already heading that way.

The latest available data from the end of September shows that long yen positions have shrunk by more than half since reaching a record high in April.

Option pricing also indicates that Jain's bet is gaining more support.

The three-month implied volatility of USD/JPY, which measures the cost of options contracts, has fallen to its lowest level in more than a year, reflecting weak demand for hedging against yen appreciation.

"Currently, the size of speculative short positions on the yen does not seem large, and we believe there is still room for further accumulation in the future," said Hirofumi Suzuki, chief FX strategist at SMBC.

Admittedly, Japanese interest rates do seem to be rising while US rates are falling—this fundamental shift has left some bold investors still confident in the yen.

But Yujiro Goto, head of Japan FX strategy at Nomura, said that in the context of generally loose financial market sentiment and low volatility, "now is indeed the time for many investors to focus on carry trades."

Carry trade means selling the yen.

"Our year-end forecast for USD/JPY remains at 155, but the risk of a spike to 160 in the fourth quarter of 2025 has increased," said Shusuke Yamada, FX and rates strategist at Bank of America.