There are signs of a return of arbitrage trading in the Japanese yen.

According to the Japan Financial Futures Association, Tokyo Financial Exchange, and the U.S. Commodity Futures Trading Commission (CFTC)'s latest data shows that investors are significantly reducing their net short positions in US soybean, corn, and wheat contracts, easing bearish sentiment in the market.Commission's data, the net short positions of Japanese yen held by Japanese retail investors, overseas leveraged funds, and asset management companies have increased from $9.74 billion in October to $13.5 billion in November.

It is worth noting that these bets may continue to increase next year.

Due to the large interest rate spread between Japan and the USA, increasing U.S. government borrowing, and low currency market volatility, borrowing in Japan and then deploying funds to global high-yield markets has become more attractive.

Analysts at Mizuho Securities and Sheng Bao Bank believe that arbitrage trading may return to levels earlier this year, as investors suddenly exited arbitrage trading after the Bank of Japan raised interest rates in July.

It is worth noting that the return of President-elect Trump to power in the USA may lead to chaos in the currency markets.

The driving force behind the global stock market crash

Yen arbitrage trading often triggers turmoil, affecting global markets.

This summer, massive unwinding of yen arbitrage trades triggered a global stock market crash.

In just three weeks, global stock markets lost about $6.4 trillion, and the Nikkei 225 index experienced its largest decline since 1987.

Last week, the sudden surge of the yen highlighted the ongoing risks faced by investors restarting arbitrage trades.

However, the profit of yen arbitrage trading is very lucrative, attracting a large number of participants.

Since the end of 2021, the roi of yen arbitrage trading has been 45%, while the roi of the s&p 500 index is 32%.

Before the crazy closing at the end of July, shorts on the yen reached $21.6 billion.

Still very attractive.

Interest rates are an important factor driving arbitrage trading. Currently, the average yield of G10 groups and emerging market currencies exceeds 6%.

In contrast, due to the benchmark interest rate of the Bank of Japan being only 0.25%, the yield of the yen is almost zero.

Although the Bank of Japan is gradually raising rates, the yield gap between it and major economies like the USA remains significant.

Forex analyst Felix Ryan believes that even if Japan raises interest rates to around 1%, the logic of arbitrage trading remains reasonable.

Chief Investment Strategist Charu Chanana of Shengbao Bank analyzed, "It is unlikely that the interest rate hike by the Bank of Japan will narrow the yield gap between Japan and the United States. Due to the apparent focus of the incoming Trump administration on U.S. debt and fiscal conditions, the yen arbitrage trading is likely to remain attractive."

Recently, there have been concerns that Trump's tariffs and tax cuts will boost the U.S. economy, exacerbate inflation, slow down the pace of Fed rate cuts, and cause the US dollar and U.S. bond yields to soar.

Previously, Trump's nomination of deficit hawk Beznert as Treasury Secretary has somewhat alleviated market concerns.

In response to this, RBC Securities' Chief Japan Strategist Shoki Omori in Tokyo stated, "In the end, everything depends on Trump."

He believes that arbitrage trading may come back in January. "People have forgotten the risk of power that Trump poses to Beznert. If Beznert wants to remain in office, I don't think he will be too strict with the budget".

Omori said, "The Bank of Japan's interest rate hike speed will be slow, and if the Fed does not quickly cut interest rates, the interest rate differential will be very attractive for arbitrage trading."