Negotiations on the exchange rate between the U.S. and Japan may be imminent, with hedge funds betting on the yen strengthening in advance.

The United States and Japan may hold exchange rate negotiations this week, with hedge funds and long-term investors betting on a stronger yen. Japanese Finance Minister Katsunobu Kato said on May 16 that he will seek the opportunity to hold exchange rate negotiations with US Treasury Secretary Scott Benevento this week, amid speculation that the Trump administration is open to a weaker US dollar. Last week, there were reports that the United States and South Korea discussed exchange rate issues in earlier trade negotiations this month, including a rebound in several Asian currencies, including the yen. Antony Foster, head of spot trading for the G10 at Nomura International in London, said, "We have seen hedge funds and long-term investors selling the dollar against the yen and other yen crosses. People speculate that Japan may also face pressure to strengthen the yen, prompting yen buyers to return to the market." In the latest semi-annual foreign exchange report from the US Treasury Department, both Japan and South Korea were included in its list of countries under currency monitoring. Concerns about the expanding budget deficit and debt in the United States led Moody's to downgrade the US government's credit rating from Aaa to Aa1 last Friday. In response to this news, the dollar fell 0.6% against the yen to 144.81. Data from the US Commodity Futures Trading Commission (CFTC) shows that as of the week ending May 13, leveraged funds' long positions in the yen reached 24,741 contracts, the highest level since September 2019. The dollar rose to over a five-week high of 148.65 against the yen on May 12, but this seemed to provide some funds with an opportunity to sell the currency pair at an attractive price. Ivan Stamenovic, head of G10 foreign exchange trading at Bank of America in the Asia-Pacific region, said, "Breaking through 148.0 makes it more attractive to establish new downside positions for the dollar against the yen." Nomura Securities also found that the currency options market is interested in trading as the yen strengthens. Sagar Sambrani, a senior foreign exchange options trader at Nomura Securities in London, said earlier last week, "The implied volatility in the forex market fell to pre-COVID levels, and we took advantage of buying yen for clients expecting a stronger yen." The risk reversal indicator for the dollar against the yen shows that the price of hedging downside risks for this currency pair has increased relative to upside risks, due to an increase in bearish option bets. Tan Teck Leng, Chief Investment Office for Asia Pacific Foreign Exchange and Macro Strategy at UBS Global Wealth Management, said that the recent increase in demand for bearish options on the dollar against the yen may be due to ongoing exchange rate discussions between South Korea and the United States.