Is a BoJ Rate Hike Discounted? How Will USDJPY React?

Markets move when there is a surprise. A long-awaited Bank of Japan rate hike, which would end the era of negative interest rates, would not be a market surprise. The only thing left is timing, either at next week’s March 18-19 BoJ meeting or in April.

The question is therefore how will the JPY react?

The answer depends on whether the rate hike is followed by an aggressive series of increases or by a gradual and slow pace of hikes.

While I do not have a crystal ball comments from BoJ officials suggest the latter (I.e. slow and gradual).

If the BoJ sends such a signal then fears of a massive unwinding of JPY carry trades that would be reminiscent of the LTCM-inspired meltdown of the 1990s seem overblown.

What does logic say?

With a BoJ decision to raise rates widely discounted and positions likely already adjusted in anticipation, logic says a dovish hike runs the risk of a buy-the-rumour reaction. The surprise would be a hawkish hike.

Whatever the case, when the dust settles the impact will not only be determined by whether JPY carry trades are unsound or continue but whether Japanese investors, pension funds, etc alter investment strategies.

Let’s keep it simple

From a USDJPY perspective, let’s keep it simple by focusing on pivotal magic levels when the dust settles on an initial reaction.

• If above 148, risk and focus is on a return to 150
• If below 146.50 risk and focus is on a run at 145.
• If between 146.50-148.00, it will be in a no man’s land of choppy trading.

Also, watch JPY crosses as that will be the clue as to any impact on carry trades to a BoJ decision.

All I can say is expect volatility around next week’s BoJ decision. The central bank will also likely be lurking in the background to contain any outsized reactions to the decision.

Note, there is also talk of a change to the BoJ’s yield control policy that will give it more flexibility in its bond market operations.

Jay Meisler, co-founder, global-view.com

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