On the eve of the Japanese general election, the yen bears make a comeback.

Hedge funds are preparing to short the yen again ahead of the key elections in Japan this weekend. Following Prime Minister Naoto Kan's emphasis on the benefits of yen depreciation before the election on February 8, the yen exchange rate has once again become the focus of attention. She called the early elections to consolidate her leadership position, and polls indicate that her party is likely to win an outright majority a result that could give her greater autonomy to implement fiscal stimulus measures and further exacerbate Japan's already heavy debt burden. The options market is reflecting this shift. According to data from the Depository Trust & Clearing Corporation (DTCC), on Tuesday, the trading volume of US dollar-yen call options worth $100 million or more (profit if the US dollar rises against the yen) exceeded that of equivalent put options. As demand for call options rises, the premium for downside risk in hedging the US dollar against the yen for the next month has dropped to its lowest level in nearly two weeks. Antony Foster, head of G10 spot trading at Nomura International in London, said, "As the market stabilizes, the extreme bubble in the precious metals market has subsided, and hedge funds are increasingly returning to arbitrage trading and trading related to Naoto Kan. With the Japanese election just this weekend, the market once again expects the US dollar/yen exchange rate to rise, especially in the event of a resounding victory for Kan." Since Naoto Kan was elected leader of the Liberal Democratic Party in October, the yen has continued to decline, with the dollar-yen exchange rate reaching its lowest point in 18 months last month. On January 23, the New York Fed adjusted the US dollar-yen exchange rate, which was followed by a sharp reversal of the yen's trend, further reinforced by comments from US President Trump a few days later. However, following US Treasury Secretary Scott Benson's reaffirmation of a strong dollar policy and the nomination of Kevin Warsh as the next Fed chairman, the yen once again faced downward pressure. The latest remarks from Kan further boosted the bullish sentiment for the US dollar against the yen. Mukund Daga, global head of FX options at Barclays, said, "Last weekend's comments emphasized the benefits of a weaker yen for exporters, which seems to have reignited interest in buying the US dollar against the yen." In contrast, asset management companies (often referred to as real money funds) have taken a more cautious stance in the recent volatility, waiting for clearer trends in currency pairs. Ivan Stamenovic, G10 currency trading head for Asia-Pacific at Bank of America, said, "Real money is mostly in a wait-and-see mode, using options for protection rather than making explicit bets on the US dollar-yen trend." However, the minutes of the Bank of Japan's January policy meeting indicate that, as authorities closely monitor the impact of a weak yen on inflation, there is a growing recognition among policymakers of the need for timely rate hikes. According to the minutes, one of the nine members of the policy committee at the Bank of Japan said, "Given that addressing rising prices is Japan's immediate priority, the central bank should not spend too much time assessing the impact of raising policy rates and should seize the right moment to take the next step hiking rates." These minutes suggest that Governor Haruhiko Kuroda's policy committee at the Bank of Japan may raise benchmark interest rates at a faster pace than market consensus. It is widely expected that the Bank of Japan will hike rates approximately every six months following its last action in December last year. The yen is evidently a key factor compared to the minutes of the previous policy meeting, the mention of "weak yen" and "foreign exchange" has doubled in the present minutes. At the January policy meeting, the Bank of Japan sent hawkish signals by revising its inflation outlook higher than economists' expectations, and there was an unexpected dissenting vote advocating for a second consecutive rate hike. In a post-meeting press conference, Governor Kuroda pointed out the need to carefully examine the impact of yen depreciation on underlying inflation. Institutions such as BNP Paribas and SMBC Nikko Securities have brought forward expectations for the Bank of Japan's next policy adjustment to April following the January meeting. Even institutions that still insist on a possible action in June or July are increasingly indicating that the risk of an early policy adjustment is rising in the context of sustained yen weakness.