The yen. It’s never complicated, but somehow it never ceases to confound.

If it seems like only a couple of weeks ago that the currency was languishing at its weakest levels against the dollar in decades, that’s because it was. But things took a dramatic turn in recent days amid speculation that the BoJ’s cautious exit from the world’s grandest experiment in ultra-accommodative monetary policy is proceeding apace (or proceeding at some pace, at least) at a time when the Fed’s poised to start cutting.

Between policy convergence (or divergence, depending on how you want to look at it) bets and likely intervention, the yen reversed course, triggering what by now looks like an across-the-board carry unwind. At the lows for USDJPY on Thursday, the yen had rallied something like 6% in two weeks. That’s a lot.

Plainly, shorts are abandoning ship. “Further hawkish price action in the yen… continues to take bodies and drive ongoing unwind in G10 FX carry and momentum,” Nomura’s Charlie McElligott said.

Again, the fundamental driver — well, besides intervention which, on a strict interpretation, is about as “fundamental” as fundamental catalysts get — is rate-hike hype ahead of next week’s BoJ meeting. On that score, Reuters moved markets with reporting which suggested, among other things, that the bank’s considering a hike and a plan to cut bond-buying in half over time.

The BoJ called an end to negative rates earlier this year. The timing of the second hike’s up in the air. There’s no “right” answer, which raises this simple question: Why not now? That is: Why not hike again this month?

The Reuters article casually noted that neutral in Japan’s probably somewhere between 50bps and 1.5%. Getting there will take forever (and a day), but traders appeared to key on the notion that the BoJ’s “a long way from neutral,” to channel one of Jerome Powell’s early communications missteps.

So, who knows. Maybe Japan will hike next week, when they’re set to unveil some specifics around QT. When considered in conjunction with (unfounded) rumors about a shock Fed cut this month, you had a recipe for additional positioning shakeouts in the currency.

“Sales of yen calls to finance purchases of puts was a trade that benefited from (and helped drive) a low volatility, slow rise in USDJPY,” SocGen’s Kit Juckes said Thursday. “Those trades can’t survive a spike in volatility, let alone an appraisal of the trade’s future as Fed easing comes closer, the US yield curve dis-inverts rapidly and BoJ rate hikes come into [view].”

The figure above illustrates Juckes’s point about the curve. The US 2s10s was on a fast track out of inversion, and that coincided with the yen squeeze and carry unwind.

Obviously, the surging yen’s weighing on Japanese equities, which made all kinds of headlines in 2024 for finally reclaiming record highs set in 1989. And it’s not just Japanese shares. Regardless of the catalyst, yen strength tends to create a risk-off optic. The yen’s a haven. When it rallies, and particularly when it rallies hard, it can cause problems for other assets. “The size of the correction in the yen is now the market’s primary preoccupation,” ING’s Chris Turner wrote.

The Nikkei’s in a technical correction now, although it’s worth noting that Thursday’s swoon was probably as much a sympathy selloff following Wall Street’s worst day of 2024 as it was a currency-driven event.

“The unwinding of yen shorts is undoubtedly contributing to the global risk-off environment [and] there is certainly more unwinding to be done here,” ING’s Turner went on, in the same note mentioned above.

I take his point, but the pace of the yen rally clearly isn’t sustainable. From here (i.e., now that positioning’s cleaner) it’s about whether the fundamentals justify an extension of the move at a more controlled pace. As Juckes put it, “a slower move lower [for USDJPY] would confirm that this really is more than just a ‘clear the air’ flush of speculative positions.”

Commenting Thursday on the carry unwind, BMO’s Ian Lyngen said that “as with the steepening of the US Treasury curve, global markets are in the process of shifting to trade the realities of the next phase in the policy cycle.”