As we previewed earlier, in today’s BOJ announcement, the Japanese central bank may announce changes to its current monetary easing framework, including adjustments to the Yield Curve Control and overhauling ETF purchases, making this the most pivotal BoJ meeting since the implementation of yield curve control almost two years ago…. or it could be a total dud.
As Goldman laid out, there are 6 distinct options facing the BOJ:
- Raising short- and long-term (10-year) interest rate targets
- Shortening the long-term interest rate target term
- Widening the tolerable band from its 10-year yield target
- Removing the guideline for JGB purchases (¥80 tn a year)
- Reducing its ETF purchase guideline (¥6 tn/year)
- Changing the composition of the ETF purchase program
Or, of course, the BOJ could simply do nothing, and merely punt to next month’s meeting, in which case JGB and TSY yields would plunge, as Kuroda will have whiffed at idea of steepening the yield curve.
The yen will also have a violent reaction to the BOJ announcement. Or not: the possible choices for the USDJPY, ranked in order of best to worst, are as follows:
- no change to policy with a commitment to monitor spillovers,
- minor changes to the program, such as changing the structure of ETF purchases and/or eliminating the ¥80tn annual JGB purchase target,
- a directive for the staff to consider sustainability adjustments in September,
- widening the band of permitted deviation for 10-year JGBs, and
- a higher yield target.
Ok, fine, but how can one trade on this information ahead of time, without knowing just what BOJ will – or won’t – announce?
Conveniently, there is a useful “tell” that could be quite critical in this specific case, especially since it boils down to something very simple: how long the BOJ will discuss before making its announcement.
Unlike the Fed, which now always makes its announcements at 2pm sharp, the BOJ’s announcement timing is “fluid”, and as Bloomberg calculates, the average time the Bank of Japan has announced decisions on a major change in policy has been at 1:12pm in Tokyo based on data starting in 2013, as follows:
Previous announcement times:
- Introduction of QQE: 1:40pm on April 4, 2013
- Expansion of QQE: 1:44pm on Oct. 31, 2014
- Introduction of negative-rate policy: 12:38pm on Jan. 29, 2016
- BOJ said it would conduct “comprehensive assessment”: 12:44pm on July 29, 2016
- Introduction of yield-curve control: 1:18pm on Sept. 21, 2016
What the chart above shows is that the BOJ takes its good time on days when there is a major change to the status quo monetary policy. And indeed, once YCC was announced back in September 2016, the central bank has been on autopilot, as policy decisions have been released between 11:41am and 12:15pm, with average of 11:58am.
Or, to summarize: the longer the BOJ huddle goes on for, the greater the probability of a major, policy-changing announcement…
… and, in the context of media leaks heading into this meeting, the most likely “major announcement” would be one in which the acceptable yield range for the 10Y JGB expands, effectively confirming rumors that the BOJ is looking to steepen the JGB curve, a move which would be seen as policy tightening, and – at least initially – send the USDJPY sharply lower.
So if it’s noon in Japan and there is still no BOJ announcement, a major policy shift is virtually guaranteed, and the best trade would be to sell the USDJPY with bond hands, on margin.
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