BoJ: New Year, Old Trick?

Once again, JPY find itself closer to historical weakness against the USD recorded in July 2024, missing just by less than four figures. The latest wave of rally comes twofold, the more hawkish Fed dot plot and BoJ disappointment. In the December meeting, the Fed has revised the dot plot to see two less rate cut in 2025. On the other hand, the BoJ continue to disappoint with no follow through of their hawkish tilt in July. Not only they did not further tighten, the lack of commitment or any kind of forward guidance have market participants scratching their head and proven that BoJ is speaking louder than their action. The divergence between 10yr U.S. Treasury and JGB yields are nearly the same currently as after the BoJ first moved away from negative rates. The lack of narrowing in yield differential has kept USD/JPY high.

The BoJ has stated in previous statement that the weakness in JPY has exerted its impact towards the Japanese economy, with the cons outweighing the pros. Multiple government officials have also expressed their concern on weak JPY towards local business. However, the lack of commitment from further tightening has left the BoJ with its old trick left to support the JPY - intervention (Buying JPY and selling foreign reserve). 

The effect of intervention to support JPY in a medium run has been inconclusive because without the changes in monetary policy and yield differential, the fundamental factor of the currency pair will not change and thus its indifferent direction. Yet, the goal of an intervention was never to directly prompt up the currency, instead it act as a shock to short term speculators and a hanging knife above market participants' head (a psychological detergent before actual intervention). That is why before actual intervention, we always hear BoJ officials' "jawboning" (verbal intervention from BoJ official or Japanese Finance Minister saying current FX moves are one sided, speculative and not ruling out any action), to remind market participants an actual intervention could be imminent and speculation is not encouraged. 

While "crying of the wolf" has reduced the impact of verbal intervention, its frequency and magnitude of rhetoric has been historically a good indicator of whether an actual intervention is imminent. Currently, we are only hearing scarcely from BoJ officials and Japanese FM to verbal intervene and suggest we may have some way before an actual intervention. It is because in their eyes the pace of weakness is more important than a line in the sand. Moreover, the latest wave of weakness is mostly driven from the Fed dot plot changes, rather than speculators which may give the BoJ second thought on spending their war chest.

Nevertheless, element of surprise is also a critical component in the strategy of intervention. Not knowing when the BoJ will intervene will keep JPY shorts on their toes and do not provide a level for speculators to challenge. In the past intervention, we are seeing the BoJ to take a change of approach. From directly intervene in the market after rate check, to hit speculators in illiquid hour and multiple intervention even when JPY is supported. If the Japan is really determined to keep JPY away from the lows without changing monetary policy, a co-operation with the U.S. cannot be avoided and should cue the market before hand. At the end of the day, the BoJ will keep on evolving their methods of intervention for maximize efficiency and historical action may not be sufficient indicators. The closet cues would be a fast decline in JPY (more than 3% in two days) and a rapid barrage of verbal intervention, before an actual intervention. But we are not seeing or hearing that now.