The yen may experience a "strong reversal". Eurizon SLJ warns that arbitrage trading faces a risk of reversal, and the US dollar against the yen may sharply decline.

As expectations regarding the Japanese economy, interest rate policies, and global fund flows change in the market, more and more institutions on Wall Street are starting to warn that the long-term weakness of the yen may be on the verge of a strong reversal, which could impact one of the most popular "carry trades" globally. Stephen Jen, CEO of Eurizon SLJ Capital, and economist and fund manager Joana Freire stated in their latest report that the yen is expected to strengthen against the dollar in the future and reverse its weak performance of the past few months. Analysts point out that the yen has long been one of the most important funding currencies for global carry trades. Investors typically borrow yen at very low interest rates and then buy higher-yielding dollar assets or other high-yield assets to earn interest rate differentials. Due to Japan's long-standing ultra-low interest rates and high interest rates in the US, this strategy has performed strongly in recent years. However, Stephen Jen warns that once market conditions change, one-sided bets often quickly reverse. He stated, "Carry trades look very stable when everything is normal, but the problem is that they often collapse suddenly." Jen specifically mentioned the yen's sharp rise event in October 1998. At that time, many hedge funds were forced to close their carry positions, leading to a sharp drop in the dollar against the yen from 134 to 120 in a single day. Analysts point out that there are similarities between the current market environment and that of back then. Eurizon believes that improvements in Japan's economic growth expectations, the possibility of future interest rate hikes by the Bank of Japan, and factors such as the Japanese government's push for corporate reform and capital inflows may lead to funds flowing back to Japan and supporting the yen's appreciation. At the same time, the Japanese government has recently intervened in the market multiple times to prevent the yen from depreciating. Eurizon further pointed out that Japanese authorities may even cooperate with the US Treasury to intervene in the foreign exchange market in the future. Currently, more and more Wall Street institutions are turning bullish on the yen. Citigroup recently advised investors to sell the dollar against the yen before the next Bank of Japan meeting next month; Bank of America has also listed several potential catalysts for being bullish on the yen. During the New York trading session on Tuesday, the dollar was quoted at 159.33 against the yen, further weakening from around 156 before the end of February when the US launched a military action against Iran. Analysts note that the Middle East situation has pushed up oil prices, which is not favorable for Japan, a country highly dependent on energy imports, and therefore the rise in oil prices has temporarily slowed the appreciation of the yen. However, Eurizon believes that this impact may be temporary. The institution pointed out that as the new Fed chairman, Powell, restarts rate cuts at some point in the future, the interest rate differential between the US and Japan may narrow again, putting pressure on the dollar against the yen once more. Eurizon stated that the Japanese economy is now capable of withstanding a stronger yen, so there is a significant risk of a pullback in the dollar against the yen in the future. Recent market data shows that global investors' bets on the yen's appreciation are rapidly increasing. According to data from the US Commodity Futures Trading Commission (CFTC), speculative funds such as hedge funds had already reached the largest long positions in yen in over 30 years.