USD/JPY: Will BoJ throw in a shock surprise?

• JGB futures implied volatility has ticked lower.
• Tokyo core inflationary data for April has continued to accelerate, above BoJ’s target for 11 consecutive months.
• USD/JPY is testing key short-term range support at 133.20.  

Today will be the first-time new Bank of Japan (BoJ) Governor Kazuo Ueda presides over BoJ’s monetary policy decision outcome. Prior public speeches by Ueda have indicated that he is in “no rush” to alter the current status quo of close to a decade-long ultra-easy monetary policy in Japan.

Hence, guiding market participants’ expectations that BoJ is highly likely to maintain its key short-term policy interest rate at -0.1% (the only developed nation central bank to have a negative rate at this juncture) and the 10-year Japanese Government Bond (JGB) yield at around 0%.

However, do not forget that BoJ’s policy-making style can take on a form of “shock and awe” that goes against prior officials’ guidance with the most recent shock episode being the 20 Dec 2022’s momentary policy decision where BoJ unexpectedly widened the band of its Yield Curve Control (YCC) program to allow the yield of the 10-year JGB to move by 50 basis points from 25 basis points on either side of the 0% target.

Let’s now highlight a few key elements to discuss the risk of a shock.

JGB futures have started to see some form of calmness

Fig 1:  10-YR JGB futures, 10-YR JGB implied volatility & 10-YR JGB as of 27 Apr 2023 (Source: TradingView, click to enlarge chart)

Since the last change of its YCC’s limits on the 10-year JGB yield, market participants have taken such a move as a precursor to an end of ultra-easy monetary policy in Japan and started to increase bullish and bearish bets on JPY and JGB respectively.

BoJ officials have voiced concerns about the increasing number of speculative net shorts positions on the JGB that bet on a heightened stance of monetary policy normalization that will likely trigger a microstructure risk in the JGB fixed-income market due to a lack of supply as BoJ has brought up an enormous amount of JGBs to maintain its close to 0% yield target. It purchased a record 136 trillion yen of JGBs in the last fiscal year, almost double the amount a year earlier.

Recent movements of the 10-year JGB futures have indicated that speculative short positioning has been reduced. The JGB futures, in terms of bond price, have rallied by 3.7% from the 13 January 2023 low of 144.32 to 148.03 as of 27 April 2023.

Also, the S&P/JPX JGB VIX Index measures the 30-day implied volatility of the 10-year JGB futures via options has declined significantly in the past four days from 9.79 printed on Monday to 4.23 as of 27 April 2023.

These observations suggest that some form of calmness in terms of JGBs speculative positioning has taken shape that gives BoJ a chance at this juncture to either further tweak its YCC’s limits to set up the tempo for future policy normalization or subtly gave guidance on a timeline to scrap the YCC program.

Tokyo’s inflationary pressures remain elevated and sticky

Fig 2:  Tokyo core & core-core inflation (Apr) & Japan core inflation (Mar) (Source: TradingView, click to enlarge chart)

We have highlighted in a previous article (click here for a recap) that the Japan core-core inflation rate (excluding fresh food and energy) for March has continued to climb upwards to 3.8% year-on-year 3.5% in February, ten consecutive months of expansion to hover close to a four-decade high.

Today’s release of the Tokyo area inflationary data tends to be a leading indicator to gauge the overall inflationary situation in Japan has accelerated; Tokyo core inflation (excluding fresh food) rose 3.5% year-on-year in April from 3.2% year-on-year in March. In addition, the Tokyo core-core inflation rate (excluding fresh food and energy) increased to 2.3% year-on-year in April from 2% in March. The core rate has surpassed BoJ’s 2% inflation target for the 11^th consecutive month.

Given that inflationary pressures in Japan have been able to maintain their upside momentum for almost a year, BoJ may take such an opportunity to lay the groundwork today for an imminent policy normalization later this year.

USD/JPY Technical Analysis – Watch the 135.20 and 133.20 key short-term levels

Fig 3:  USD/JPY trend as of 28 Apr 2020 (Source: TradingView, click to enlarge chart)

The USD/JPY has started to trade sideways since last week and continued to churn within a minor uptrend since the 24 March 2023 low of 129.64.

Watch the immediate support at 133.20 and a break below it may expose the next support at 131.80 (also the ascending trendline in place since the 16 January swing low).

On the other hand, a clearance above 135.30 short-term pivotal resistance is likely to see the next key medium-term resistance zone coming in at 137.10/137.90 (also the key 200-day moving average)

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