Japanese Yen Rallies as BOJ Begins ETF and REIT Unwind

The Bank of Japan may have held rates as expected, but they delivered a hawkish surprise by announcing the start of unwinding their oversized ETF and REIT holdings. Japanese government bond yields surged, while the yen strengthened broadly, with USD/JPY and EUR/JPY both sliding over -0.4%. This symbolic shift away from the Abenomics era raises the risk of an October rate hike.

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BOJ ETF and REIT Unwind Sparks Yen Rally

The Bank of Japan may have held rates as expected, but they delivered a hawkish surprise by announcing the start of unwinding their oversized ETF and REIT holdings. With the central bank now set to gradually release ETFs into the market, Japanese government bond yields climbed and the yen strengthened broadly against its peers.

This marks a significant and symbolic step away from the ultra-loose policies of the Abenomics era. The BOJ will sell around ¥330bn of ETFs per year and about ¥5bn of REITs, proportionate to their existing holdings. The pace can be adjusted at future meetings, but the key takeaway is that the BOJ has officially begun the process of reducing its unconventional asset holdings — the start of a longer-term unwind. This could also be the prelude to a hike at their October meeting.

The Japanese yen is currently the strongest FX major, with USD/JPY and EUR/JPY falling over -0.4% after the announcement. EUR/JPY and GBP/JPY have also met their average daily range ahead of the European or US open, to show significance behind the news.

Chart prepared by Matt Simpson, data source: LSEG

Japanese Yen Futures Positioning (JPY/USD): Weekly COT Report Analysis

This week’s COT data shows traders steadily increasing net-long exposure to Japanese yen futures, which could pressure USD/JPY lower. The left panel highlights a clear rise in gross-longs and net-long exposure among both large speculators and asset managers, while gross-shorts have edged lower.

Importantly, asset managers boosted their gross-long exposure to yen futures by 8.9k contracts last week, reaching 118.2k – the sharpest weekly increase since April. With the BOJ announcing plans to unwind its ETF and REIT holdings, these positioning shifts suggest asset managers were well-placed ahead of the central bank’s hawkish surprise.

Charts prepared by Matt Simpson, data source: CME, LSEG

Japanese Yen Rallies Against FX Major Peers Post BOJ

The sharp move in Asia suggests potential follow-through in the European or US sessions. However, with BOJ Governor Ueda yet to speak, any effort to cool speculation over an October rate hike could see yen strength quickly unwind.

Still, today’s reaction highlights the directional risk if the BOJ signals further tightening. All major yen crosses have turned lower, while Nikkei futures dropped sharply, decoupling from the Nasdaq and retreating from record highs.

Chart analysis by Matt Simpson - data source: TradingView

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-- Written by Matt Simpson

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