RBC BlueBay is bullish on the Japanese Yen against the US Dollar, with political transition and the potential for the Bank of Japan to raise interest rates as supporting factors.

The Royal Bank of Canada (RBC) subsidiary BlueBay Asset Management has established a long position in the Japanese Yen, betting on Japan's political transition and the possibility that the Bank of Japan may raise interest rates in October to further strengthen the Yen. BlueBay's Chief Investment Officer Mark Dowding said, "We have established a position in the US Dollar against the Yen at just below the 150 level, using a short position in the Dollar. We do believe there is a good chance of action in October. So, as long as Koizumi wins the leadership contest in the Liberal Democratic Party, now is a favorable time to go long on the Yen." Japanese Minister of Agriculture and reformist figure, Shinzo Abe, announced his candidacy for the leadership of the Liberal Democratic Party on Tuesday, with investors believing that Abe is more likely than his competitor, Seiko Noda, to support a rate hike. Noda is seen as more inclined towards loose monetary and fiscal policies. The Liberal Democratic Party is the largest party in Japan's ruling coalition, and will hold the leadership election on October 4. Earlier, following a big defeat in the July general election, Prime Minister Shizo Abe decided to resign. The USD/JPY exchange rate has fallen below key technical support levels. BlueBay expects the USD/JPY exchange rate to fall to around 140 in the short term, and a more reasonable medium-term rate near 135. Over the past three months, the Yen has been the worst-performing G10 currency against the Dollar, depreciating by 0.8%. BlueBay's views sharply contrast with those of hedge funds. As of September 2, hedge funds have been increasing their short positions on the Yen for the fourth consecutive week. Strategists at Bank of America and HSBC HOLDINGS also believe that the Yen will further weaken against the Dollar. There have been reports that despite political unrest, the Bank of Japan may still raise rates again this year, causing traders to increase their bets on the Bank of Japan further tightening policy. Overnight index swap trading currently indicates a 60% probability of a rate hike by the end of the year. It is expected that the Bank of Japan policymakers will keep the benchmark rate unchanged at 0.5% at this week's policy meeting. Political and fiscal uncertainties in Japan have pushed up long-term bond yields, with Japan's 30-year bond yield reaching a historical high of 3.285% earlier this month. Dowding believes that this level is "fundamentally attractive." BlueBay currently holds a long position in 30-year Japanese government bonds. Dowding said that if Koizumi wins the LDP leadership contest and the Bank of Japan subsequently raises rates, he will consider switching to "long-term bonds", which will make him "believe that policymakers are taking the right steps" to control inflation. The Bank of Japan will announce its rate decision on Friday, while before that, the Federal Reserve will hold a policy meeting, with markets widely expecting a 25 basis point rate cut. As of the time of writing, the USD/JPY exchange rate is holding near 146.49.