The yen’s recent rally marks the beginning of a broader correction in the currency’s long-running undervaluation, according to Edmond de Rothschild Asset Management. Michael Nizard, head of multi-asset and overlay, wrote that the Japanese currency is starting to trade more on its own fundamentals after years dominated by US-Japan rate differentials and its role as the funding currency for global carry trades. He stated that any pullback across JPY crosses should be seen as an opportunity to rebuild or add to long-yen exposure.

The yen rallied over 3% this month due to expectations for faster Bank of Japan tightening and speculation over shifts in Japan’s pension fund allocations, prompting investors to unwind bearish positions. US Treasury Secretary Scott Bessent challenged traders to test his resolve on boosting Japan’s currency, citing “pretty good insight” into Japanese policymakers’ intentions. Further yen gains could force investors to unwind carry trades financed with cheap Japanese funding, potentially prompting sales of Treasuries, credit, and equities as leverage is reduced.

Japanese investors remain major buyers of foreign assets, and any repatriation to attractive domestic investments could unsettle global bond markets. Nizard noted the broader effect would make global markets less reliant on cheap yen financing. The recent coordinated intervention by Japan and the US signaled that the market can no longer assume yen depreciation will be tolerated indefinitely, turning a perceived one-way trade into a two-way risk.

While the adjustment may not be linear, pullbacks should be viewed as opportunities to rebuild long-yen positions if the broader shift is sustained.