In the early hours of Thursday UK time, the Bank of Japan will meet and speculation is rising about some kind of policy shift to counter the weakness in the JPY. Weakness in the JPY is a mixed blessing to Japan. On one hand, the weak JPY boosts Japanese exports, but on the other hand, the rising input costs for importers increase expenses. In short, Japan is growing increasingly uncomfortable with a very weak JPY. The JPY has been the weakest of the G8 currencies this year losing nearly 10%.

Japan’s finance minister Suzuki has recently stated that he discussed the possibility of currency intervention with Janet Yellen to halt some of the falls in the JPY. See here. So, this puts the BoJ meeting this week in intense focus for investors.

BoJ in focus

The surge higher in US 10-year yields on bullish Fed expectations for their May FOMC meeting has been making things harder for the JPY as the USD keeps gaining. The question now is whether the BoJ will act to halt the Yen weakness on Thursday. Here are the main options:

  1. The BoJ could widen the bond yield target from 0.25 bps on the upside to 0.50 bps. This would get reduce of some of the yield differentials between the US and Japanese bonds and allow the Yen to retrace.
  2. The BoJ could increase rates. The unlikely option, but still they could.
  3. The BoJ could simply express growing concern over JPY weakness and give an indication of future intent. This could alleviate some near-term JOY weakness.
  4. The BoJ could do nothing and leave it for government intervention.

This is not a calendar event to front run and there is a genuine risk that the BoJ postpone action at this meeting and leave it to Japanese Government officials to try and tackle. However, any traders who are short the JPY would be wise to take profit ahead of Thursday’s meeting as Governor Kuroda has surprised markets in the past and could do so again in Thursday. If the BoJ hike rates or extend the end yield target on the 10’s then expect the JPY to strengthen into the weekend and that would be best expressed through USDJPY shorts. Always manage risk.