Hedge Funds Are Betting Yen May Slide to 165 Before Intervention

Hedge funds are increasingly betting that the Japanese yen will weaken to 165 to the dollar before government intervention, despite warnings from officials. The yen has fallen to its weakest level against the U.S. dollar in 18 months, with USD/JPY closing at 158.46 on Wednesday.

The weakening yen is fueled by speculation that Prime Minister Sanae Takaichi may call a snap election in February 2026 to secure a stronger mandate for her Liberal Democratic Party (LDP). Investors see such an election as a potential catalyst for more aggressive fiscal stimulus, which could further weaken the yen and boost equities according to Bloomberg analysis.

Market participants are actively trading leveraged structures such as reverse knock-out options, which are more cost-efficient than standard call options. These structures expire worthless if a specific price barrier is breached, allowing investors to profit from a potential yen slide before intervention as reported.

Why Did This Happen?

Prime Minister Takaichi’s plans to call a snap election are reshaping market expectations. With her approval ratings high, investors believe that an election could lead to a stronger LDP majority and continued fiscal expansion according to Bloomberg.

The yen’s weakness has sparked renewed debate about Japan’s fiscal policy. The Nikkei 225 stock index reached a record high, while 30-year Japanese government bond (JGB) yields climbed to 3.52% as of January 13, 2026 as data shows.

How Did Markets Respond?

The yen has weakened steadily, with USD/JPY approaching levels last seen in July 2024, when Japan’s Ministry of Finance last intervened. Some investors are hedging against potential intervention by buying put options according to Bloomberg.

Trading data shows a significant imbalance in options activity. Calls, which benefit from a rising USD/JPY, dominated puts by a wide margin in contracts with notional values of $100 million or more as reported.

Finance Minister Satsuki Katayama has expressed concerns about the one-sided weakening of the yen and met with U.S. Treasury Secretary Scott Bessent to discuss the issue. Katayama emphasized that Bessent shared Japan’s concerns about the rapid depreciation according to Bloomberg.

What Are Analysts Watching Next?

Market participants are closely watching whether USD/JPY will approach the 160-165 range, which is seen as a potential trigger for intervention. Japan’s Ministry of Finance has previously intervened when the pair reached similar levels in 2024 according to Bloomberg.

Analysts like Sagar Sambrani of Nomura International note that leveraged structures are being used to capitalize on expected central bank actions. Meanwhile, Barclays’ Mukund Daga highlights that some investors are seeking short-term downside protection as Bloomberg reports.

The yen’s continued weakness and the political uncertainty surrounding Takaichi’s plans suggest that the market is preparing for a potential reflationary policy shift. However, any move toward 160 could prompt a stronger response from Japanese authorities.