The Bank of Japan has a problem. Politically, there is pressure to relieve domestic markets from the impact of a weak yen. Yes, a weak yen helps some of Japan’s big export carmakers, but it does make imports more expensive for the domestic market. This has created political pressure to deal with the persistent weakness of the JPY. Look at the marked falls in the JPY below to see the impact of the BoJ’s ultra-loose monetary policy. The recent rise in oil prices has also been weakening the JPY. Japan is a net importer of energy so high energy prices also tend to weaken the JPY.

So, markets are increasingly expecting this pressure to materialise with the Bank of Japan altering its ultra-loose monetary policy, which includes negative interest rates. We have recently seen Governor Ueda’s comments being taken by the market, as signaling a potential end of negative interest rates around December this year, but these comments were countered by the BOJ as being “misunderstood “. This means that at some point the Bank of Japan will need to communicate the exit of negative interest rates and inflation pressures in Japan have been rising and this has led markets to expect a question of when, and not if, the Bank of Japan starts raising interest rates into positive territory. An exit of negative interest rates would strengthen the yen and this would also relieve pressure on Japan’s domestic economy.

What to watch over the BoJ meeting

Any indication or signal that the Bank of Japan will start considering exiting negative interest rates should result in the Yen immediately strengthening. In order to benefit from yen’s strength, the yen should be paired with another weak currency. The Bank of Japan’s interest rate decision is due on early Friday morning UK time around 3:30am. Watch out for JPY volatility around this time. The EURJPY should fall in the event of clear signaling by the BoJ that interest rates are due to rise in early 2024.

Trade risk

The obvious risk is that the BoJ maintains its ultra-loose monetary policy and the yen remains weak out of the event.