Hedge funds have recently placed big bets on the Japanese yen, and they are not holding back.

Latest data shows that by the week of December 14th, leveraged funds' net short positions in the yen skyrocketed to 85,000 contracts, approaching the second-highest level since July this year. Even more astonishing, this has been the second consecutive week of significant increase—the figure reached a peak of 92,000 contracts last week (December 9th).

Why are the shorts so determined to bet against the yen? The answer is quite simple: the "yield trap" created by the US-Japan interest rate differential. The 3 percentage point interest rate gap between the US and Japan forms a black hole, and even though the Bank of Japan has started raising interest rates, it cannot plug this gap. Holding yen assets? That’s effectively losing money—Japan’s current inflation rate is higher than the policy interest rate, and real interest rates have been negative for a long time. Investors have a clear choice: rather than holding depreciating yen, it’s better to switch to high-yield assets.

This script has played out before. Remember the disaster last year when USD/JPY fell below 160? The Japanese Ministry of Finance was forced to intervene in the currency market in July to stabilize the situation. Now, with the yen pushed to the brink again, will a new round of currency defense be launched? The entire market is holding its breath, waiting for the answer.