Hedge Funds Bet on Yen Breaking Out of August’s Range Weakness on External Risks

TradingKey - The Japanese yen has been confined to a narrow trading range throughout August, caught between the Bank of Japan’s rate hike prospects and concerns over Japan’s fiscal deficit. Now, with growing external disruptions — including shifts in U.S. monetary policy — hedge funds are increasing bets on a yen breakout to the upside.

Data from the Chicago Mercantile Exchange (CME) shows that leveraged investors are building bullish positions through the options market, aiming to profit from a potential move in USD/JPY from its current range around 147 toward 145.

USD/JPY Exchange Rate Chart, Source: TradingKey

Bloomberg notes that key drivers for yen strength could include:

• Trump’s attempt to fire Fed Governor Lisa Cook and pressure the Fed to cut rates
• Political turmoil in France boosting demand for safe-haven assets like the yen
• A potentially weak U.S. nonfarm payrolls report this week, reinforcing expectations of Fed rate cuts

On Tuesday, August 26, following news of the legal battle between Trump and Cook and France’s no-confidence vote, CME’s USD/JPY put options volume was four times higher than call volume. The most actively traded put option was for September expiry at a strike price of 144.93.

Barclays noted that after this wave of news, hedge funds showed rising interest in downside USD/JPY options.

Nomura added that after Fed Chair Powell’s Jackson Hole speech, they observed a resurgence in demand for options betting on a weaker USD/JPY.

Yen Depreciation Risks

Strong wage growth in Japan is building momentum for the BoJ to resume rate hikes before year-end, as BoJ Governor Kazuo Ueda has repeatedly emphasized. This domestic factor supports yen appreciation.

However, economic data shaping the rate hike outlook remains mixed. On September 1, data showed that Japan’s manufacturing operating profits fell 11.5% YoY in Q2, marking two consecutive quarters of decline. The Ministry of Finance warned that U.S. trade policy poses downside risks to the Japanese economy.

As a cornerstone of Japan’s economy, the auto sector has been hit particularly hard. In the second quarter of 2025:

• Toyota, the world’s largest automaker, reported revenue growth but a 37% YoY plunge in profit
• Honda’s net profit halved
• Nissan swung from profit to loss

All three Japanese auto giants attributed their weak performance to U.S. tariff policies.