What to make of Nikkei: “BOJ to consider adjusting YCC upper band to rise above 1%” -12 hours prior to Bank of Japan policy statement release (once again).
And here we go again.
11pm Japan time heading into day 2 of the Bank of Japan’s October 2023 Monetary Policy Meeting and policy statement release, Nikkei, the..
Bank of Japan Public Communications Arm State Media Outlet
…Japanese business news media conglomerate, reports:
Ok. A few things.
First – yes, this is indeed coming directly from the Bank of Japan.
However, it does not (yet) mean that this will be the policy – it’s now in the markets’ hands.
In case you’re unfamiliar, this is a classic case of what I call a BOJ “Press Test” – in which Bank of Japan directly “leaks” policy agenda out to the public via select media outlets, then observes the market reaction, and makes decisions accordingly.
If you think I’m being ridiculous, fair enough. If you think this concept itself is ridiculous, you need to wake up to reality, and understand how this BOJ regime under Governor Ueda operates. Ueda is by far the most blatant press addict among any major central bank head in the modern QE era.
Of the five BOJ monetary policy meetings under (still)-rookie Governor Ueda, three of them have seen this movie (if we include what is underway right now for October BOJ):
July 28 2023 at 2:00am Japan time – markets expecting policy unchanged to be announced 10 hours later:Nikkei: “BOJ to discuss yield curve control tweak to allow rates over 0.5%”BOJ Official Policy Statement: YCC upper band lifted to 1% from 0.5% with “flexibility” in bond buying operations. i.e. Nikkei dead-on correct (obviously).
April 28 2023 – The very first meeting under Gov Ueda (or, the first in a decade without Gov Kuroda). 10:30AM on the MORNING OF (i.e. DURING what’s supposed to be day 2 of the actual BOJ April Meeting): Nikkei: “BOJ will be unchanged with policy, will conduct a policy review that will take at least one year to complete, and will modify its forward rate guidance” dropped roughly 1-2 hours ahead of the expected official policy release.
BOJ Official Policy Statement: > 1 hour later than usual release time (to watch markets into PM session) – unanimous vote for policy unchanged + 1 year policy review. i.e. Nikkei dead-on “correct” (obviously).
October 30th 11pm Japan time
…currently underway now.
So, will BOJ will lift YCC bands to > 1% + more “flexibility” ?
Not necessarily. Though this YCC band increase above 1% is likely to be what ultimately transpires, this is NOT yet a done deal – because BOJ themselves do not know yet.
Press Tests are not just used to test out policy with the option to take it back- but they have also been used to purposely clear out market positioning and let out the volatility release valve pressure, prior to a policy release and press conference.
And between either: 1) testing policy on markets, or 2) TRYING to MOVE markets prior to a policy release, I suspect the latter is currently the priority underway – particularly regarding the yen, as well as JGBs.
What markets do from here, and over the next half day until approximately noon in Tokyo will determine whether or not this YCC further widening of trading bands above 1% will become the official policy statement or not.
In other words, we – in Tokyo, and globally, and yes – the BOJ’s market operations staff – we are all watching markets. And very highly likely Governor Ueda himself, also sitting in his Uniqlo pajamas and watching green and red blinking tickers right now as I write this.
The Purpose: Try To Trigger the JPY Short Squeeze (Again)
Recall in my last article about Yentervention – I discuss how one year ago in October 2022, MOF was successful in triggering a massive, record sized JPY short squeeze that bled out into other asset classes (US Treasuries), and nailed the timing so that a turn in macro fundamentals would then sustain the short covering.
Triggered vs Sustained: Here is the most important chart of this yentervention saga- the “second times a charm” in matching up the timing of the JPY forced short SQUEEZE, which subsequently bleeds into a series of macro catalysts for the sustained JPY short COVER… (read full here)
This chart above from 2022 – THIS is what BOJ (and MOF) are trying to pull right now in their ideal, best case scenario – and again, if you haven’t read my previous article on the matter, please do so, as you will not know (that you do not know) the critical context.
In fact, what would REALLY be the absolute best case scenario for Japan officials? To have the Nikkei trigger a short squeeze on JPY, which then avalanches into a cross-asset, forced-exiting of short JPY, and then BOJ can simply remain policy unchanged, as if none of this had to do with them.
And/or, if said short squeeze on JPY had also triggered a similar forced buy/covering on short JGBs and short USTs/global DM rates positions (as per what I discuss in my article that had occurred in Oct 2022) – despite this headline being one of a YCC trading band LIFTING. In that scenario, the BOJ would have pulled off buying some further YCC optionality without having to pay the market for it, and simultaneously take care of the issue of a weak yen teetering on the cliff, on behalf of MOF.
In other words – get the markets to short cover upon themselves, and Japan officials don’t have to lift a single market intervening finger, neither in JGB markets as the YCC 1% upper band comes closing in, nor USDJPY as the 152 levels also nears.
Note that this isn’t an impossible wish either- even on the JGB directional upside scenario. Before Nikkei’s latest press test, markets and “consensus” was pretty split on BOJ this week, with many expecting / positioning for a BOJ YCC change. But this time, the “YCC change” trade isn’t being expressed via FX (long JPY) due to yentervention/not levels making the yen a very artificially unpredictable market. Instead, those who bet on a YCC change flooded into a more direct short JGB futures trade instead of expressing it via the long JPY trade.
JGB futures open interest is at all time highs – and much of that is short – all you need is just directional volatility that would be a flicking of a match into a gasoline soaked barn:
So, as of now, where do we stand now with Nikkei’s latest Press Test?
Well, the JPY short squeeze did come – but as of this writing, it doesn’t look like its nearly enough momentum – but who knows, the night / day / early AM is still young.
Green and Red Blinking Ticker Markets Snapshots: FX, Rates, Equities
JPY Futures and Spot USDJPY
Approximately $4.16 billion notional in trading volume on JPY futures in the first few minutes, which matches (if not exceeds) the early October “yentervention” move triggered at 150 from my previous article:
JGBs and Rates
JGB futures however look like they’re simply getting sold further down, in line with the Nikkei’s narrative:
Which then makes for USTs to also sell off (US yields higher) – though not to the degree that JPY is moving currently.
JPY vs 10Y UST Futures
JPY carry trade and equities:
Two popular currency pairs funded with a JPY short leg: Mex Peso / yen, and Aussie yen.
NKY Futures vs MXNJPY:
NKY Futures vs AUDJPY
BOJ’s Most Revealing Press Test
I leave you with the following.
Here is the most important one of all the aforementioned press tests – this one from just last week on October 24th
The above is absolutely true, and has been how BOJ operates policy decisions. They are very much day-trading monetary policy, and not out of “stupidity” or “irresponsibility” or what have you – but simply because Bank of Japan’s policy is so very much directly MARKET oriented. They ARE the JGB market – at the long end as well. And they’ve also become the currency market driver (in a bad way).
Meaning, BOJ does not have the luxury of “Long and variable lags” – they have to deal with whatever markets are doing. And if they are currently spiking yields and USD, then BOJ, unlike any other major central bank, must play ball too.
That’s why BOJ policy and Japan CPI are almost irrelevant- relative to the immediate of rates and FX markets.
So – is BOJ policy now out there, thanks to Nikkei? No, not yet. Markets will tell us all (BOJ included) what the policy release will be in a few hours.