The BoJ Chases the Yen

But a hawkish policy pivot isn't the golden ticket for USD/JPY.

According to a Bloomberg report gaining traction overnight, Bank of Japan (BOJ) officials are open to raising interest rates at a faster pace than the consensus. This would be in part to deal with inflation, but clearly with one eye also on USD/JPY, which traded through the 163.00 handle yesterday to print 40-year highs.

It’s true that shorting the Yen at these levels doesn’t offer an attractive risk/reward profile, which is why we took profit on our call spread a month ago. Yet although the concept of more targeted and frequent rate hikes, combined with more verbal intervention, could act to put a top in USD/JPY for the immediate term, the medium-term implications of tightening policy ring alarm bells to us that this would be a clear policy mistake, and ultimately hurt the Yen rather than help.