SINGAPORE, Jan 26 Reuters Investors positioning for Japan39;s first rate hike in nearly two decades have cooled on outright cash bets on the yen rising and turned to the options market to guard against any potential disappointment.

Japanese inflation has run above policymakers39; target for well over a year and Bank of Japan BOJ Governor Kazuo Ueda39;s confidence that price gains are sustainable has strengthened an investor consensus that a rate rise will happen within months.

At the conclusion of its twoday policy meeting this week, the BOJ maintained its ultraeasy monetary settings but signalled its growing conviction that conditions for phasing out its huge stimulus were falling into place.

It is likely that higher short term rates would lift the yen and Japanese government bond yields, at least briefly.

A backdrop of markets dominated by U.S. data and the dollar, and a broad decline in foreign exchange volatility which lowers options prices has made options an attractive and riskcontrolled way to trade the anticipated policy shift.

Some players are positioned for a dollaryen downside into March or April, because there39;s still a chance for the BOJ to scrap negative rates at the March or April BOJ meetings, said Yujiro Goto, head of FX strategy for Japan at Nomura.

So I think a threemonth option position makes more sense for speculators than cash short positions at the moment.

For an upfront fee, or premium, an option allows investors to bet on currency…