Two weeks ago, a wave of closing arbitrage trades centered around the yen triggered a global collapse, but now this type of arbitrage trade seems to be quietly making a comeback.

Since August 5th, the yen-dollar exchange rate has fallen by more than 5%. At that time, a series of factors, including Japan's hawkish monetary policy initiative, concerns about US yields, and weak employment reports pushed the yen to a seven-month high.

Nomura International found that many investors have started selling yen again and investing the proceeds in other high-yielding assets. This indicates that corporate clients and hedge funds that have always been keen on arbitrage trading are re-participating in these trades.

Anthony Foster, Director of Spot Trading at Nomura in London, said, "Arbitrage trading has seen a clear rebound" after US retail sales data exceeded expectations. He said that multiple accounts sold yen and bought Australian dollars and British pounds.

Over the past week, the yen shorts in the ATFX global market have increased by about 30% to 40%, of which a large part is driven by hedge funds and high net worth investor clients.

William Vaughan, Deputy Portfolio Manager at Brandywine Global Investment Management, said of arbitrage trading and investors engaged in arbitrage trading: "People's memories are short. There are too many momentum traders in this field."

A key issue for investors still watching arbitrage trading is whether the Bank of Japan will raise interest rates again this year. Masahiro Noda, Deputy Governor of the Bank of Japan, has said that decision-makers will not raise interest rates further if the financial markets are unstable. If the Bank of Japan stands pat, the attractiveness of returning to the market will only grow.

Traders may further define this trade this week. Haruhiko Kuroda, Governor of the Bank of Japan, will speak at the Diet on August 23rd. If Federal Reserve Chairman Powell responds to some traders' bets that the Fed will cut rates by 50 basis points in September in his Jackson Hole speech on the same day, yen arbitrage trading may become more daring.

Since touching 141.70 on August 5th, the yen has fallen to around 149, but investors remain cautious about selling the yen in view of its sudden surge earlier this month.

Nomura Securities' Foster said, "Yen short positions have been swept away, but this market is extremely fragile." The latest data from the Commodity Futures Trading Commission shows that speculative traders cut their bets on short yen significantly in the week ending August 6th.

Even if Kuroda and Powell pave the way for investors to buy the USD/JPY, it does not mean that they will rush to do so.

M&G Investment Management has reduced some long yen positions, saying that although the yen is undervalued, it may remain so for some time.

Jim Leaviss, one of the UK's most famous bond investors and head of M&G's fixed income division, said the yen is "definitely cheap, but we're not foolish enough to think it will quickly return to fair value."

According to Nick Twidale of ATFX, there is already evidence that investors are shorting the yen again as part of their strategy to buy high-yielding assets. "Arbitrage trading is still very important," said the Sydney-based chief analyst.

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