- BoJ's Upcoming Meeting: BofA anticipates that the BoJ will maintain its current monetary policy in the September Monetary Policy Meeting (MPM), but suggests traders watch for indications of possible operational adjustments to the Yield Curve Control (YCC) and any shifts in BoJ's broader policy stance.
- FX Volatility and Intervention: Low FX volatility means the Japanese government is less likely to directly intervene in the FX market, which is typically done to stabilize excessive volatility.
- Yen Weakness and Monetary Policy: As direct intervention is limited, monetary policy remains one of the primary tools available to counteract yen weakness. The BoJ has been collaborating with the Ministry of Finance (MoF) since around the July MPM to mitigate the yen's depreciation.
- Challenges with Monetary Tightening: Due to structural issues, including Japan's significant public debt, the BoJ's capacity to rapidly tighten monetary policy is restricted.
- Hawkish Tone: BofA predicts that the BoJ might attempt to strike a hawkish tone in the September MPM. They may allow long-term JGB (Japanese Government Bonds) yields to rise by making operational adjustments.
- Impact on Yen: Despite potential hawkish signals, BofA believes these won't fundamentally address the yen's weakening. With the FX rate now potentially influencing the BoJ's decision-making process, the market might be motivated to short the yen and its duration to gauge the BoJ's response.
- USD/JPY Reaction: If USD/JPY remains unaffected by potential verbal interventions from the BoJ and surpasses the 150 mark, the risk of a direct FX intervention by the MoF may rise.
BofA suggests that the BoJ is in a tight spot concerning the yen's depreciation. While they might adopt a hawkish tone and make minor operational adjustments, BofA believes this won't fundamentally address the yen's underlying weakness. If the market tests the BoJ by shorting the yen, and USD/JPY breaks the 150 threshold, there could be an increased likelihood of direct intervention by the MoF.