Speculators may have ramped up their bets against the yen to record highs, but some long-term investors see a hefty drop in the Japanese currency as an opportunity to buy on the cheap.
Hedge funds and other speculators have helped dump the yen to a record low against the euro and eight-year troughs against the Swiss franc and sterling this month, but some portfolio managers have been quietly betting against the trend.
Strong Japanese fundamentals and the prospect of a stronger Chinese yuan as China lets its currency rise more freely are amongst the reasons.
"Medium-term, we think the yen has to rise on back of the fact that the Japanese economy is recovering, yields are rising, and China will have continue to revalue," says Dilip Rasgotra, global head of fixed income and currency research for Credit Suisse Asset Management (CSAM) in London.
Certainly, many big investment banks have been bullish on the yen for years, only to see their predictions fail to materialise as the Japanese currency weakened further. But CSAM, which manages around $400 billion of assets for its clients, is putting its money on the line, Ragostra said.
It has pared some of the currency hedges it uses to insure its portfolio against the risk of a weaker yen versus the euro, even as the euro shot to a record high of 150.73 yen last week and has gained more than 6 percent this year.
"We think between 150-155 is really the top end of the range," said Rasgotra. "If it were to reverse we could easily see somewhere in the range of 120-125 medium term."
Although many global portfolio managers do not hedge their exposure to the yen, some use options or forward contracts to lock in exchange rates and prevent big swings in currencies from affecting the value of their portfolios.
Foreign funds have been big buyers of Japanese equities in recent years, helping the benchmark Nikkei index rise 114 percent from a two-decade low in 2003. Foreigners bought more than 10 trillion yen of Japanese stocks last year, the highest on record.
Despite such buying, the yen has been weak, partly since foreign purchases of Japanese stocks have been outweighed by Japanese investors selling yen to buy higher-yielding debt in everything from the New Zealand dollar to sterling.