Expectations of further yen weakening are becoming more entrenched among investors, as can be seen in tumbling hedging costs after the Bank of Japan raised interest rates while pledging to keep policy easy.

Three-month yen basis swaps, used by Japanese money managers to protect against a strengthening local currency eroding the value of their foreign investments, illustrate that. The instruments, which indicate decreasing demand for hedging the more they rise, closed last week at the highest level since January 2022.

It’s been a tough couple of years for Japanese funds seeking higher returns overseas as the yen lost almost a quarter of its value, making it pricier to buy assets abroad. Currency hedging costs have also soared as Japan kept negative interest rates until this month while global peers rushed to tighten policy to tame inflation. Signs of a decline in hedging demand suggest that local investors are less concerned the yen will rebound sharply.