Odd Lots · Thursday, August 6, 2026
Brad Setser analyzes the drivers of Yen weakness, noting that while some speculation exists due to the Yen's low yield making it a funding currency, hedging flows from real money investors also play a significant role. This contrasts with classic speculative currency attacks.
“There's a bit of speculation around the end. You know, there's not a clean measure of the speculative flow. But like you know, look, the end was one of the lowest yielding currencies, so it was a typical funding currency. I don't think the carry trade was on an enormous scale, but there were certainly hedge funds others who more or less thought that the Ministry of Finance was going to allow the yen to weaken beyond what it had weakened before.”
“And then you have weird hedging dynamics. So there's a little bit of a head dynamic where when the NICK goes up, foreigners holding the NICK need a hedge a bit more because some do partially hedge. When the Nasdaq goes up, the GPIF doesn't hedge, so it doesn't generate an offsetting hedging flow. And then, despite all the hedge America stories from last year, in Japan, the key fixed income hedged investors seem to have gone a little bit less hedge.”