Wall Street Slaughtered On Its Consensus Yen Long As Traders Position for Much More Losses Versus Dollar

After this weekend’s victory of Japan’s first soon-to-be-female Prime Minister, Sanae Takaichi – which came as a shock to everyone with Goldman saying that “virtually no one—including media, political analysts, opposition parties, and even LDP insiders—had expected this result” – no one perhaps… except our readers whom we told she will be the next Japanese prime minister one month ago – Bloomberg reports that short-term yen sentiment underwent its biggest bearish repricing since late July as the currency hits a two-month low in the spot market.

As BBG FX strategist Vassilis Karamanis writes, pro-stimulus lawmaker Sanae Takaichi’s near-certain elevation as Japan’s next prime minister took traders by surprise, and options show a rush to own downside exposure in the yen, despite its already steep decline which sent it to the lowest level since early August and, prior to that, since February.

Indeed, the one-week risk reversals in USDJPY rally to 44bps, calls over puts, after trading by 22bps in favor of the yen earlier. This is the third most bearish reading in the past three years.

As Karamanis notes, it’s a common picture across the pair’s vol skew which shifts higher across tenors this morning. The largest move is seen on the two-week tenor where risk reversals are heading for their strongest close in favor of the greenback since Sept. 2022

Understandably, all of Wall Street has been wrongfooted on the move: recall not long ago we showed that the most consensus trade across all of Wall Street’s trading desks was to be short the dollar (and hence long various G7 pairs like the Yen). 

Favorite trades:

Goldman: short dollar
Morgan Stanley: short dollar
Deutsche Bank: short dollar
JPMorgan: short dollar

— zerohedge (@zerohedge) June 7, 2025

And sure enough, all those banks made a long yen trade the centerpiece of their USD hate and loathing… until last night, when bank after bank were stopped out. 

Here is Deutsche Bank’s George Saravelos, who from biggest dollar bull became one of the biggest dollar bears on Wall Street, and now his clients are not too happy with that reversal. From his note published overnight:

We went long JPY in our FX Blueprint but are now getting out following the LDP election outcome this weekend. Sanae Takaichi’s surprise victory reintroduces too much uncertainty around Japan’s policy priorities and the timing of the BoJ hiking cycle. 

There is agreement that inflation is a problem in Japan, but uncertainty is now going up again on how it will be dealt with. We have written at length about the growing political recognition of inflation as a problem – one which has contributed to LDP’s losses in recent elections. Takaichi has acknowledged the need to prioritize measures to counter inflation and has avoided repeating comments from 2024 that the BoJ would be unwise to hike. But her stance on addressing inflation still looks different from traditional policy prescriptions. We note she has: (1) argued that inflation in Japan is more cost-push than demand-pull; (2) emphasized fiscal relief over monetary policy to address price pressures and not ruled out cuts to the consumption tax; (3) noted that the government and BoJ should work closely together; (4) floated a plan to broaden the coalition, which could bring in more dovishly inclined parties like the DPP. The JPY has struggled to capitalize on the Fed repricing story in recent months, and we have argued BoJ hikes would be an important catalyst to watch for. The increased uncertainty around the timing of the next hike leads us to retreat to neutral position on the JPY.

We are turning neutral the JPY awaiting greater clarity. We still see the case for eventual BoJ tightening, a decline in USD hedging costs, extreme undervaluation, and repatriation into Japanese assets as being important drivers of a medium-term JPY view. But these positive catalysts seem to be lacking right now given the political surprise. And without them, fighting the negative carry of being long JPY is too hard. We will be actively watching the shape of the Cabinet, coalition and policy priorities to guide our JPY view from here.

Here is Goldman’s FX strategist Michael Cahill closing out his short USDJPY trade at a 230 pip loss (full note here).

Sanae Takaichi’s surprise victory in the LDP leadership election and the little premium priced into FX going into the event leaves scope for a quick reset higher in USD/JPY of +1.5-2% in the early trading hours, with elevated two-way risk thereafter as markets assess the likely policy path ahead.

In our economists’ base case, we expect only modest changes to the fiscal stance and no change to our modal path for the BoJ. This argues that much of the new fiscal risk premium should fade, similar to the market’s eventual assessment following the Upper House election and PM Ishida’s subsequent resignation. However, with Takaichi in power, and some of these things likely to take at least a few months to become clear, we expect the market impact to also be more durable this time.

For some time, we have been making the case that global risk sentiment should be more important than domestic developments for the direction of the Yen, and that is still the case. However, it seems likely that domestic developments will add another headwind to Yen performance. We see upside risks to our USD/JPY forecasts and are closing our trade recommendation to go short USD/JPY (initiated at 147.69).

Going down the list: UBS, Citi, MS, etc… everyone. And so the penguins turn. All else equal we would have said this is the time to close out on our long-standing yen short position which is now drowning in positive carry, but we are confident the currency will keep falling until at least 160 before the BOJ steps in. After all, Japan’s exports are plunging and the economy is on the verge of another recession which means there is just one way to kickstart it: crush the currency and send stocks soaring, aka old faithful.