Ahead of the Japanese elections, hedge funds strengthen yen selling—Demand for put options signals a turning point

With an important national election scheduled in Japan this weekend, activity among macro hedge funds and investment institutions has intensified, with positions being built based on expectations of a decline in the yen. This shift is clearly reflected in the behavior of the options market, suggesting a rapid change in market participants’ sentiment.

Clear Demand Shift Seen in the Options Market

On Tuesday, trading in dollar-yen call options exceeding $100 million in volume outpaced the corresponding put options. According to data from Jin10 and statistics from custodial trust and settlement agencies, this trend is direct evidence that the market anticipates further appreciation of the dollar-yen pair.

Of particular note is the fact that the one-month hedge premium against a decline in the dollar-yen has fallen to near its lowest level in just two weeks. This indicates a relative decrease in put option demand and vividly illustrates that investors are shifting toward more bullish positions.

Return of Carry Trades and Signs of Market Integration

Anthony Foster, head of G-10 spot trading at Nomura International in London, commented on the changing market environment:

As market volatility has sufficiently subsided and excessive fluctuations in the precious metals market have eased, hedge funds are returning to arbitrage and carry trade strategies. Even with the upcoming important political event of the Japanese election this weekend, market consensus expects the dollar-yen to reach higher levels. Particularly if the election results are positively received by the market, this trend is likely to strengthen further.

The shrinking demand for put options and the active trading of call options symbolize that the market is not merely riding short-term fluctuations but is increasingly leaning toward a more structural trend of yen depreciation and dollar appreciation.