Speculators are getting ready to take on Bank of Japan Governor Kazuo Ueda yet again as he gears up for his first policy meeting next week.
(Bloomberg) — Speculators are getting ready to take on Bank of Japan Governor Kazuo Ueda yet again as he gears up for his first policy meeting next week.
Wagers are in place for the BOJ to adjust its stance, months after it doubled its yield cap to 0.5% in a surprise move that jolted global markets. Japan’s elevated inflation and the illiquidity of its bond market are fueling bets for a change despite Ueda’s insistence at his inaugural news conference that it’s “appropriate” to stand pat.
The bets set the stage for a showdown as BOJ officials are said to be wary of tweaking or scrapping their yield control stimulus at next week’s meeting. Policy makers are reluctant to act so soon after the banking crisis overseas clouded the outlook, according to people familiar with the matter.
The following three charts show how rates and currency traders are positioning in the run-up to the April 28 decision.
Swaptions
Option-implied volatility in yen swap rates, known as swaptions, signals that the market is bracing for turbulence in the next three to six months — pointing to expectations for a policy shift during the period.
The BOJ’s stance is guided by its joint agreement with the government which sets a 2% inflation target for Japan. Ueda said this month there’s no need to revise the framework for now although there’ll be scope for talks if the economic and inflation outlook change drastically.
“If needed, Ueda likely will request the government to revise the joint statement so that the BOJ can respond flexibly, without sticking with the continuation of monetary easing,” JPMorgan Chase & Co.’s Benjamin Shatil and Ayako Fujita wrote in a note. “Markets have concluded too quickly that yield-curve control policy will remain static for an extended period under Ueda.”
JPMorgan expects the BOJ to adjust or abandon its yield-curve control at the June meeting, with the risk of an earlier move.
Yen Volatility
Demand for yen call options relative to puts over the next two weeks is higher than those for longer term contracts. That suggests traders are hedging for a stronger currency in the event of a BOJ move and ahead of a Federal Reserve policy decision.
“Risk premiums remain rich for options covering the April and June meetings” despite a slight decline in those for the nearer gathering, said Ryo Suzuki, executive managing director at SBI Liquidity Market Co. “It looks like traders are opting for strategies such as put spreads and risk reversals to eschew high premiums on at-the-money options while hedging against any possible change to BOJ policy.”
These strategies combine buying and selling options so that premiums from the latter reduce the costs.
Options signal a 40% chance that the yen will climb past its Jan. 16 high of 127.23 per dollar by end-July, which would be the strongest level since May 2022. It traded around 134 on Thursday.
Overnight-Indexed Swaps
Still, it should be noted that wagers for a rise in short-term interest rates have eased since the BOJ’s last policy decision on March 10. Swap traders are penciling in an end to the negative-rate policy in April 2024, compared with September in pricing seen last month.
One possible hurdle to a normalization in policy has emerged in the form of a potential national election. If a vote takes place, the BOJ may refrain from executing a shift to avoid roiling local financial markets.
Prime Minister Fumio Kishida may call for polls before the end of the current Diet session on June 21, Ataru Okumura, a senior rates strategist at SMBC Nikko Securities Inc., wrote in a note. “The BOJ has never tightened policy before a national election since 1989.”
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