The yen is entering a glorious month: it has recorded gains in this month for the past five years.

That may encourage investors who have pushed the yen up 9% in the past six months, during which the global trade war and Donald Trump's call for U.S. interest rate cuts have weighed on the dollar. The yen has risen every July since 2020, averaging 2.8% against the dollar, making it the strongest month in the same period.

Analysts attribute July's outperformance to a variety of factors, including policy changes by the Bank of Japan, position adjustments before the August summer vacation, and exporters converting overseas income into yen to pay dividends. While some of these factors may play out again this month, the main driver this time may be the broad slide in the dollar.

"Liquidity is down and a lot of managers are on vacation, so it makes sense to reduce risk exposure," said Neil Newman, chief strategist at Astris Advisory Japan KK. "I don't see any reason why July this year will be different."

Some investors are already preparing for a stronger yen. The current U.S.-Japan talks are still ongoing, and the Bank of Japan will set interest rates at the end of the month. Leveraged funds' net long yen positions increased by 7,301 contracts to 15,935 in the week ended June 24, according to data from the U.S. Commodity Futures Trading Commission.

The yen rose last week when the central bank's most hawkish board member said that if inflation risks rise, it may be necessary to raise interest rates even if economic uncertainty remains. According to overnight index swaps, traders expect about a 40% chance of a rate hike before the October meeting and more than a 50% chance of a rate hike before the end of the year.

"The yen may strengthen," said Hiroshi Namioka, a fund manager at T&D Asset Management Co., who expects trade talks to make progress this month and the Bank of Japan to release a tougher stance, which will be good for the yen.

Buy-side investors may increase their yen positions before the summer vacation in August, he said. At the same time, manufacturers or business operators will convert dollars into yen to obtain funds before the vacation, he added.

Takeshi Ishida, currency strategist at Kansai Future Bank, said July's gains are likely to be lower than the more than 7% gain in the same period last year. He said the market is about to hold a historically large number of yen longs into the summer, and those positions may be unwound, leading to a weaker yen.

Regardless of the specific factors on the yen side, the direction of the dollar this month is likely to determine the direction of the yen. The dollar index fell about 10.8% in the first six months of this year, the worst first half performance since Richard Nixon was president in 1973.

"The trend in the foreign exchange market in 2025 is a weak dollar," said Adam Button, currency analyst at Forexlive.com. "The trade war is the main reason for this situation, and Trump seems ready to escalate the trade war again in early July. This is not good for the dollar."