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The market reassessed the differences between the monetary policies of the United States and Japan, and the weakening trend of the yen intensified

Zhitong Finance APP has learned that the yen's decline looks set to intensify in the coming weeks as traders recalibrate their expectations for U.S. and Japanese monetary policy.

A key options-based short-term positioning indicator showed traders were the least bullish on the yen since August, with speculative accounts from Japan to the United States selling the yen on Thursday. However, there is still room for the yen to weaken further, with technical indicators showing that a rebound late last month pushed the yen into overbought territory.

It all comes down to the diverging trends in Japanese and U.S. monetary policies. The possibility of the Bank of Japan exiting negative interest rates as early as January now seems unlikely, given that Japan has recently suffered a severe earthquake and the government is mobilizing aid. In the United States, expectations for a rate cut by the Federal Reserve are easing in light of solid employment data, causing the 10-year Treasury yield to exceed 4%. This has helped the U.S. dollar outperform other major currencies, while the Japanese yen has lagged.

"The rise in USD/JPY has more to do with the pickup in U.S. yields than Japan-specific reasons," said Aroop Chatterjee, macro strategist at Wells Fargo in New York. "The market may have priced in too much of a Fed rate cut too quickly," he added.

It is understood that when market conditions change, such as changes in the direction of interest rates or expected adjustments in monetary policy, investors and traders will quickly adjust or close their trading positions to adapt to the new conditions, resulting in a surge in trading activity. CME futures trading volume on Wednesday reached its highest level since Dec. 19. Meanwhile, yen options activity on Thursday was the highest since Dec. 14, according to data collected by the Depository Trust & Clearing Corporation.

The yen fell as much as 1.1% against the dollar on Thursday, falling to its lowest level in more than two weeks. The yen has fallen more than 2% this year.

The yen's underperformance in currency markets is a familiar story. Analysts ended each of the past two years bullish on the yen, but that optimism faded as it became clear that bond markets were overheated. In 2022, a dramatic shift in Bank of Japan policy brought new calls for yen strength; in 2023, bullish bets on the yen increased in anticipation of Fed policy easing.

Alan Ruskin, macro strategist at Deutsche Bank, said: "It feels like everything is repeating itself, and the trading market in early 2024 will be mainly affected by whether the U.S. bond market bulls were correct in late 2023, or whether the market overreacted."