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BOJ Misstep Tonight Could See Japanese Yen Strengthen

BOJ Misstep Tonight Could See Japanese Yen Strengthen

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- BOJ thinks speculative flows, not failing policy, are driving Yen.

- Failure to do much beyond IOER cut could see Yen behave similar to January/February 2016 after initial cut into negative territory.

- FX market volatility will run higher the next two days with the FOMC and BOJ meetings - it's a good time to review risk management principles.

The Bank of Japan kicks off an exciting 24-hours of central bank meetings (followed by the Federal Reserve tomorrow at 18:00 GMT), and the odds are running high that disappointment will be the only clear result.

It's no secret that the Japanese economy continues to struggle with low growth and deflation concerns. Yet Japanese policy officials in recent weeks have blamed market forces - speculators - as the cause for driving asset prices rather than the fundamentals - the lack of a sufficient policy response to ward off growth and deflation concerns.

What this means for tonight is that the BOJ finds itself in a similar position to the European Central Bank: that it doesn't necessarily want to expand its easing program now; but rather wants to ensure its ongoing effectiveness and respect from market participants. Should the BOJ opt for another IOER cut deeper into negative territory, with additional reminders that 'more can be done in the future,' the BOJ may very-well see a January/February 2016 redux on its hands.

Ultimately, dropping the IOER deeper into negative territory will do little to address the overarching concerns facing Japan: an aging population, shifting demographics, and an unmanageable debt burden. While the BOJ may scare off 'speculators' in the short-term by doing so, like we saw earlier this year, Yen weakness shouldn't last long. Indeed, such a prognosis by the BOJ would be tantamount to a policy misstep (the BOJ is the problem, not the market!) and ultimately resolve itself in broad Yen strength over the coming weeks.

Read more: Few US Data Pre-FOMC Keeps Markets on Edge

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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