Hedge Funds Double Down as Japanese Equities Tumble and Yen Surges

In a significant shift, Japanese equities have plummeted over the past week, prompting a surge in bearish bets from hedge funds at a speed not seen in five years. The Nikkei 225 index expanded gains to 2%, settling at 35,527.88 points while the Topix index increased by 2% to 2,510.96 points. Among individual stocks, SoftBank's shares surged by 9.8%. The reversal of carry trades has been cited as a crucial factor driving the recent surge in the yen, capturing the market's attention. Yet, Nomura's latest report suggests that yen carry trades have not been fully unwound. In a report released Wednesday, Nomura analyst Yoshitaka Suda noted that data from the U.S. Commodity Futures Trading Commission (CFTC) showed yen short positions had halved as of last Tuesday compared to July 30. While CFTC data provides critical insights into market positions, it's important to note the lag in data publication. Furthermore, CTAs (Commodity Trading Advisors) appear to have turned net short on USD/JPY, although some macro funds still maintain yen carry trade positions. Yen carry trading involves borrowing low-interest yen and investing the funds in higher-yielding assets like stocks or other currencies, aiming for interest rate differentials. This strategy has been particularly popular in the global environment of low interest rates. Shinichi Uchida, Deputy Governor of the Bank of Japan, stated on Wednesday that the central bank would not raise rates during periods of market instability. This dovish signal caused the yen to abruptly fall. Nomura pointed out that although macro funds have reduced their short positions on the yen, the yen's depreciation could increase the risk of a rate hike by the Bank of Japan, posing a threat to carry traders. The institution also mentioned that recent volatility in U.S. equities could affect global markets, including yen carry traders, who might need to further reduce their long positions in U.S. stocks. The current landscape highlights the intricate balancing act faced by investors. Rising yen positions, volatile global markets, and central bank policies all contribute to a complex financial environment where timing and position adjustments are crucial. As investors navigate these complexities, the focus will be on macroeconomic indicators and central bank actions to gauge future market movements.