Despite 32 of 41 economists predicting BoJ Governor Kuroda will unleash moar monetray stimulus tonight (and Abe will keep promising larger and larger money drops), FX traders have rarely been this concerned about what happens next. The cost of protecting against overnight volatility in the yen has exploded to its highest since Lehman (Oct 2008). At a time when the balance sheet of The BoJ is as big as The Fed's, there is a lot hanging on the hope that Kuroda continues his voyage into the surreal and repeats the same mistakes to save the world.
The Bank of Japan’s unprecedented asset-purchase program – put in place to try to end decades of deflation – has increased its balance sheet almost to the size of the Federal Reserve’s (upper pane below)…
And while USDJPY overshot to the upside (yen weakness), as the lower pane above shows, the recent yen strength has recoupled USDJPY to the ratio of Fed/BOJ balance sheets (in USD terms). Without further asset purchases, rather obviously, USDJPY will tumble (yen strength) and possibly create a vicious cycle.
But as Bloomberg notes, Bank of Japan Governor Haruhiko Kuroda has never been one to be swayed by market expectation. But this week, investors are leaving him very little room for maneuver.
Four in five economists predict additional stimulus Friday — the most since Kuroda presided over his first policy meeting in April 2013 — with an increase in purchases of exchange-traded funds the most likely option, followed by a deeper cut in the negative deposit rate. After inaction at the previous two policy meetings sparked yen rallies, Citigroup Inc. warns the currency could surge about 5 percent toward the 2 1/2-year high of 99.02 per dollar it hit after the U.K. voted to leave the European Union.
“If Governor Kuroda sticks to the same optimistic economic scenario he’s presented in the past, there’s a risk dollar-yen will break 100,” said Osamu Takashima, a Tokyo-based strategist at Citigroup, the world’s biggest currency trader. “Expectations have built up so much, the yen will eventually strengthen against the dollar whether the BOJ acts or not.”
Expectations for swings in the currency over one week surged the most since 1995 last Friday, as the BOJ’s decision day entered the time horizon. The difference between implied and realized volatility reached the widest since the 2008 financial crisis.
“Market pricing has never been so certain of more easing, so if the BOJ doesn’t act, it’ll be a really big disappointment,” said Daisaku Ueno, the chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “It depends on the starting level, but the yen could get back to the cusp of 100 per dollar.”
The intensity of the speculation around a direct underwriting of government spending speaks to Japan’s struggle in stoking consumer prices, which economists forecast declined in June for a fourth month. Investors and former government watchers have expressed doubts about the sustainability of the central bank’s bond purchase program, and people familiar with the matter have told Bloomberg that an increasing number of officials at the BOJ are similarly concerned.
For Mizuho Securities Co., the weight of expectation may be too heavy for the BOJ to ignore, even though there is a view in the market that the current yen level means the central bank doesn’t need to rush to add stimulus.
“There’s the idea that the BOJ has to act now because putting it off risks a sharp surge in the yen,” said Kenji Yoshii, a Tokyo-based currency strategist at the brokerage. “It means that whichever option they take, it’s going to be a surprise for markets.”
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