The BOJ Pain Threshold Is Near, If Not Already Reached

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by Tyler Durden
Tuesday, Oct 24, 2023 - 05:00 PM

By Ven Ram, Bloomberg markets live reporter and strategist

Shorter-dated volatility expressions in Japan’s currency markets may be underpricing the risk of sharp moves in the yen ahead of this month’s central bank review.

For instance, the two-week implied volatility on USD/JPY is hovering around 8%, well dwarfed by the successive peaks we saw through much of last year as the currency wobbled.

Yet, there is a sense of immediacy coming out of the Bank of Japan with regards to its curve-control experiment, just hours after the central bank intervened in the bond market.

Among them:

Bank of Japan officials “are likely to monitor bond yield movements until the last minute before making a decision on whether to adjust the yield curve control program.”

Implicit in that wording is the suggestion that the central bank may be ready to adjust its curve control before next week’s decision, should push come to a shove. That may be especially so should the functioning of the bond market worsen.

As noted here, there comes a point in any intervention where the tipping point is determined not by the amount of money spent in defense of a policy but by the dislocations that it spawns. And the BOJ sources story suggests that the pain threshold is near, if not already reached.

While an end to negative rates may still be away, a shift in curve control may come sooner than markets reckon.