The trade that was supposed to showcase the yen’s long-awaited comeback is turning into a lesson in crowded positioning. After rally optimists built one of the biggest bullish bets on the Japanese currency in decades, the yen has instead sunk to nine-month lows around 155 per dollar, forcing funds to rush for the exit.

Positioning whiplash

For much of this year, macro funds and real-money investors liked the same story: Japan was finally escaping deflation just as the U.S. economy showed signs of cooling. In that script, the Bank of Japan would slowly normalise policy, the Federal Reserve would edge toward cuts, and the yawning rate gap would start to narrow in the yen’s favour.

Reality looks different. U.S. growth has held up better than many expected and hopes for a quick Fed easing cycle have faded. Treasury yields are still high by recent standards, while Japanese yields remain heavily capped. That combination has kept carry trades attractive and made it painful to be long a currency that still pays very little to hold.

As USD/JPY pushed through 154 and briefly tested above 155 this week, many of the speculative longs that had been built up on the futures and options side started to unwind. Dealers describe an “orderly squeeze” rather than outright panic, but the message is clear: what looked like a one-way macro story now feels far less certain.

Politics that like a weaker yen

The policy backdrop in Tokyo is also nudging investors away from the strong-yen narrative. Prime minister Sanae Takaichi has packed key posts with pro-stimulus voices and made it clear she favours generous fiscal spending and low borrowing costs to support growth. That mix usually points to a softer currency, not a stronger one.

The Bank of Japan, for its part, last intervened and nudged rates higher back in 2024, which briefly gave the yen some breathing room. Since then officials have stressed that any further tightening will be gradual at best. Markets now price in only a couple of small rate hikes next year, far too little to close the gap with U.S. yields.

That leaves verbal warnings and the threat of FX intervention as the main tools against yen weakness. But without a clear shift in BOJ policy, and without explicit backing from Washington, many desks doubt that sporadic yen-buying will do much more than slow the move unless the currency slides toward far more extreme levels.

Why it matters for FX and beyond

The yen still sits at the heart of global funding markets. A weak, low-yielding yen encourages classic carry trades into higher-yielding Asian and emerging-market currencies. If USD/JPY keeps grinding higher, those trades can look attractive again in the short term, even as they raise the risk of a sharp reversal if Japan finally does tighten more forcefully.

For Japan’s own economy, the move is a double-edged sword. Exporters and stock indices tied to overseas earnings tend to welcome a cheaper currency, but households are already grappling with higher import costs and above-target inflation. The more the yen slides, the more pressure builds on politicians and the BOJ to act, even if they would rather prioritise growth.

What traders are watching next

In the near term, FX desks are focused on three signposts:

• how aggressively Japan’s finance ministry talks about “one-sided” moves if USD/JPY probes above recent highs again;
• whether positioning data confirm that the speculative yen longs have largely been flushed out or still have further to unwind;
• and if incoming U.S. data and Fed speeches solidify or undermine the idea of a single rate cut in December.

For now, the yen comeback trade is not dead, but it has clearly been delayed. Until Tokyo’s policies and the Fed’s trajectory start to move in the same direction, betting on a powerful and lasting yen rebound will remain a high-conviction call in a market that is suddenly short on conviction.