The Japanese yen increased following two members of the Bank of Japan dissenting and calling for a rate hike. Despite this, the USD\/JPY pair remained below 147.50, indicating a limited response to the news.<\/p>\n
The Bank of Japan decided to keep its main policy rate at 0.5%, a move anticipated by many. The dissenting members argued that the current inflation level justified an increase in rates.<\/p>\n
The Bank of Japan is also poised to commence the sale of its holdings in Exchange-Traded Funds (ETFs) and Japanese Real Estate Investment Trusts (J-REITS).<\/p>\n
With two dissenting votes wanting a rate hike, the Bank of Japan’s unified dovish front is clearly cracking. This is the most significant signal for us, as it increases the probability of a policy change in the near future. The market is now forced to price in a higher chance of a hike at the next meeting.<\/p>\n
The planned sale of ETFs and J-REITs is a subtle form of quantitative tightening that will reduce liquidity. We’ve seen this movie before with other central banks; it’s a clear step towards policy normalization. Japan’s core CPI has now remained above 2.5% for six consecutive months, providing the perfect justification for these hawkish moves.<\/p>\n
Given this shift, we should expect JPY volatility to climb from its recent lows. We saw how implied volatility spiked during the policy shifts of 2023, and the 3-month JPY volatility index has already ticked up 8% this week. This makes long volatility strategies, such as buying straddles or strangles on USD\/JPY, an attractive proposition.<\/p>\n
The path of least resistance for USD\/JPY now appears to be downwards. While the drop to below 147.50 is modest, it likely marks the beginning of a larger move, especially when we recall the highs above 155 reached back in 2024. Traders should consider using put options to position for a stronger yen, targeting a move towards the 142-144 range over the next few weeks.<\/p>\n
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