By Gregor Stuart Hunter and Rocky Swift
SINGAPORE, April 29 (Reuters) - Investors have built the biggest short yen position in nearly two years, selling the currency against the euro, Swiss franc, British pound and Australian dollar in a bet that neither rate hikes nor risk of intervention will come to its rescue.
The position is also the largest since Japan last intervened in the foreign exchange market in 2024 and sets the stage for a test of the country's resolve to defend the yen against speculation.
The Bank of Japan left interest rates on hold at 0.75% on Tuesday, opting against a step that could relieve pressure on the currency. Governor Kazuo Ueda also signalled readiness to raise rates to fight broader inflation, but the yen barely moved. At a headline CPI rate of 1.5%, real rates, after subtracting inflation, are sub-zero. A separate index which excludes volatile fresh food and fuel is running at 2.4%.
"I don't expect the situation of negative real interest rates to change," said Sho Suzuki, market analyst at Matsui Securities in Tokyo. "So I believe there is a high likelihood that the yen will remain weak," he said.
The yen has rarely been weaker than it is now against the euro at any time since the creation of the single currency. Yen selling in recent days has sent the currency to its weakest on record versus the Swiss franc, to its softest against sterling since the global financial crisis and to its most unfavourable rate against the Aussie dollar in more than three decades.
Japan's retail currency traders, nicknamed "Mrs Watanabe," hold their biggest short yen positions against crosses, or currencies besides the dollar, since February 2020, according to HSBC.
Against the U.S. dollar, the risk of direct intervention has paused a five-year slide that over the past year has defied a sharp narrowing in the gap between U.S. and Japanese yields that the currency pair previously tracked.
The exchange rate has steadied just short of 160 per dollar - a level widely regarded as a red line for the authorities - over the past seven weeks. That has added to the attraction of being short yen by making it more comfortable to borrow for "carry" trades that earn interest from foreign assets.
"All those (rates) models point to the yen being much stronger than where it is," said Cameron Systermans, head of multi-asset for Asia at Mercer Investments in Tokyo, pointing to fair value below 150 yen per dollar over a one-year horizon.
"(But) being short yen, you can earn some carry on that position and so you're getting paid to hold it, and for that reason, a lot of people are happy to run with it," he said, though with a warning that momentum could switch suddenly.
'NO RULE, NO MANUAL'
Intervention remains one of the biggest risks to yen weakness, raising fears of a resurgence in the yen like the kind which rattled global markets in 2022 and 2024.
However, those efforts only temporarily bolstered the yen, which has fallen steadily over the past year. With the presence of a large gap between BOJ interest rates and those of other central banks, it's not clear that the Ministry of Finance would be any more successful this time.
Finance Minister Satsuki Katayama has issued threats to the market for months, and a rate check conducted by the New York Fed in January indicated to many traders they should not test Japanese authorities further.
But such hints have become a less reliable prelude to actual intervention and market sensitivity has fallen as ramped-up rhetoric has not been followed through.
A phrase like "decisive action", which many market participants believe authorities use to signal imminent intervention, was not used in September 2022 until after it had been carried out, said Junya Tanase, chief Japan FX strategist at JPMorgan Chase & Co in Tokyo and a former special officer for FX reserve management at Japan's Ministry of Finance.
"This suggests there is no rule, and no manual," he said.
To be sure, some fundamental indicators, such as interest-rate differentials, suggest the yen can rally and there are plenty of investors who think it will.
"The yen is ridiculously undervalued," wrote Vincent Deluard, director of global macro strategy at StoneX in San Francisco, in a note earlier this month. "The yen would rally if the U.S. and Iran reach a deal to permanently reopen the Strait of Hormuz."
Still, with no deal, no hurry in Japan to raise rates and a backdrop of nerves about high and rising government spending, short bets have climbed steadily since February to their highest since July 2024, Commodity Futures Trading Commission data showed.
"Both the BOJ and the government are in denial in terms of the fiscal cliff that they're facing, and no amount of intervention is going to really work here," said Olivier d'Assier, lead principal of investment decision research for Asia at consultancy SimCorp in Singapore.
"And for investors, that means you need to pay them more to hold on to long debts," he said. "If you don't pay them more, then they'll go somewhere else, which means they'll sell the bonds (and) they'll sell the yen."
(Reporting by Gregor Stuart Hunter in Singapore and Rocky Swift in Tokyo; Additional reporting by Sugiyama Satoshi; Editing by Tom Westbrook and Jacqueline Wong)
