Australia's second-largest pension fund manager, Australian Retirement Trust (ART), has established its largest yen overweight position in years, wagering that the market is underestimating the Bank of Japan's rate hike trajectory. The fund, which manages approximately A$370 billion (US$265 billion) in retirement savings, has been increasing its yen exposure over the past six months as the currency approached 160 against the U.S. dollar, partially funded by trimming dollar allocations.

Senior portfolio manager Jimmy Louca told Bloomberg News that the fund is taking a contrarian stance, going long the yen while many investors seek to short it. The yen hit a roughly 40-year low against the dollar last month as traders bet the BOJ would be hesitant to raise rates amid high energy costs. Louca believes the market is only half right—the drag of rising energy prices on the yen has been fully priced in, but expectations for BOJ rate hikes remain insufficient.

"If both these factors reverse, the yen should find support," Louca said. "We are now overweight the yen, and it looks very cheap." Swap market pricing indicates an 80% probability of a BOJ rate hike in September, with a full conviction of action by October at the latest. Louca suggests the central bank could raise rates as soon as next month, potentially signaling two additional hikes, to act before rising energy prices complicate policy decisions—especially if Middle East conflicts escalate following the U.S. midterm elections in November.

If the BOJ acts broadly in line with these expectations, Japanese government bond yields could move higher, Louca noted. He estimates the fair value for USD/JPY is around 150, with a possible decline to the upper 140-149 range. The pair currently trades near 159.21. He also highlighted a clear divergence in how Japan and the U.S. approach currency and bond market intervention—Japan's government is effectively buying time for higher rates to eventually support the yen, while U.S. efforts to suppress Treasury yields are swimming against fundamental currents.