Investor appetite for the Japanese yen has deteriorated to its most pessimistic reading in four years, with market participants pointing to monetary and fiscal policy risks as the principal drivers of expected further weakness, Bank of America Global Research reported in its latest FX and Rates Sentiment Survey.
The survey findings followed a turbulent week for the currency. The yen recorded a brief uptick on Friday after comments from Japanese officials endorsing greater domestic investment by pension funds, but the dollar still finished the week with a modest gain versus the yen. That left USD/JPY trading close to levels not seen since 1986 and maintained investor focus on the possibility of official intervention from Tokyo.
BofA's July survey showed bearish views toward the yen had reached their most extreme point since 2022. Respondents overwhelmingly cited risks stemming from the Bank of Japan's policy path and Japan's fiscal stance as the main reasons they expect the currency to weaken further. Those policy-related concerns ranked ahead of narrower interest-rate differentials or valuation-based rationales.
While the survey noted that overall conviction among investors remains relatively muted, policy risks dominated replies. The bank observed that investor positioning had only recently shifted to a modestly bearish stance, which it interpreted as reflecting continued caution among many market participants given the known risk of intervention by Japanese authorities. At the same time, speculative data sketch a more aggressive picture.
BofA highlighted CFTC figures showing leveraged funds are carrying their largest net short yen positions since 2007, underlining the extent to which some investors are betting against the currency despite repeated official warnings. The survey concluded that the threat of intervention has probably limited how far positioning could have moved toward even greater bearishness.
The report also referenced public remarks from Finance Minister Katayama that monetary policy should remain the remit of the Bank of Japan. Alongside those comments, BofA noted suggestions that Japan's Government Pension Investment Fund could increase allocations to domestic bonds. Taken together, these developments point to growing sensitivity among policymakers to pressures building in both the yen and the Japanese government bond market.
Investor skepticism has centered on whether the Bank of Japan will tighten policy quickly or deeply enough to close the large interest-rate gap with the United States. Within BofA's broader survey, respondents identified the BOJ as the central bank most likely to introduce more rate hikes than markets are pricing in, yet many participants still expect any normalization to lag the pace needed to provide meaningful support to the yen.
Markets will be watching the Bank of Japan's policy meeting on July 30-31, where policymakers are widely expected to hold the benchmark rate at 1% and release updated quarterly economic and inflation forecasts. That event is positioned as a potential inflection point for expectations, but the survey signals prevailing doubt about near-term, decisive action from the BOJ.
External forces have reinforced demand for the dollar. Rising Ultra 10-Year U.S. Treasury Note Futures and expectations that the Federal Reserve could keep interest rates elevated have continued to support the dollar, adding pressure on the yen even as the likelihood of intervention remains an active consideration for traders.
Overall, BofA's findings portray a market where policy concerns - both about the BOJ's path and government fiscal measures - now outweigh valuation or interest-rate differential arguments in shaping negative sentiment toward the yen. At the same time, significant short positions by leveraged funds indicate a layer of conviction behind that sentiment, tempered by the recognition that official intervention remains a material risk for positioning.