How on Earth are Hedge Funds and Investment Banks able to borrow Yen from Japanese Banks? Do they establish direct lending connections with Japanese Banks? Or are they using the Future or Forex markets to somehow get their hands on Yen which they can sell for Dollars or other currencies and invest?

You can short currencies just like you can stocks or bonds. Behind the scenes, your brokerage or clearing firm has on a borrow agreement with people who are long yen. Those people might include Japanese banks and companies, but all sorts of people have yen.

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