BoJ watch - a traders' guide to JPY moves on the day

As detailed in the BoJ meeting preview yesterday, the market is on edge for significant movement – case in point, USDJPY 1-day implied volatility (vol) currently sits at 49% - for context, this equates to a 279-pip move (higher or lower) on the day (with a 68% level of confidence), where the market feels fairly confident the upside should be contained into 131.00.

You can see the implied volatility (vol) matrix, which uses 1-day option implied volatility, and we assess the expected move derived from this vol – essentially, it replicates the straddle breakeven move, which is what options traders use as a quantitative guide for movement, which they can then buy and sell vol accordingly.



As a spot FX trader, I can use this to understand expected movement over a set period, which can dictate the market regime I trade in intraday – it also helps guide my position size and whether I even hold positions at all over news.

When we see vols so incredibly high, it would be a surprise if this meeting proved to be a non-event, which is a debate I’ve been having with clients – the question for me is what scenario is 1) most likely 2) what is the ‘pain trade’?

I list the expected policy measures below which have been widely touted as the most likely responses to be seen today. My own view is the BoJ YCC (yield curve control) program is on borrowed time – there is rising political pressure against it, the market is forcing the BoJ to buy unsustainable levels of bonds daily and Japan has a rising inflation problem that is seeing the fair value of JGB’s yield rise.

My own view is the most likely action is that we see no. 1 enacted, with the YCC band rising to 1%, subsequently giving them more time to fully abolish YCC in the months ahead. However, I acknowledge the chance of no. 5 or 6 is also high.

The big moves in the JPY, JPN225 and JGBs come if we see no.4 or 6, with no. 5 also offering big potential movement. The pain trade is likely seen in no.6 (no change at all) – given expectations, positioning (the market is heavily short JGBs and long JPY), and options traders short delta exposure – if that plays out the JPY could get smoked.

Recall, the main policy shifts we could see are:

1. To widen the current 10-year JGB cap again, to 0.75% or 1% from 0.5%
2. To shift the target JGB yield from the 10-year JGB to the 5-year JGB.
3. To raise the 10-year yield target to 0.1% from 0% currently
4. To terminate and close off the YCC program completely
5. To terminate the YCC adding a temporary QQE program and a commitment to provide two-way liquidity
6. To leave the policy unchanged

So, for those involved today keep your eyes peeled for headlines from 12 pm – it could get a little crazy. After pegging the JGB market for seven years, we typically get vol when we move away from a well-trodden regime.