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Kuroda Stares Down Market Bets for BOJ Pivot During His Term

·4 min read

(Bloomberg) -- Market bets the Bank of Japan will join the rush to tighten policy have retreated ahead of Thursday’s policy decision, with no repeat expected of the fireworks lit by short sellers targeting the yen and government bonds in previous months.

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Hedge funds seem to have backed down from big bets that Governor Haruhiko Kuroda will tweak the BOJ’s yield-curve control doctrine, although the yen is still uncomfortably close to the key psychological level of 140 per dollar that could reignite speculation over currency intervention.

The BOJ is pushing back against normalizing policy even as peers around the world race to hike rates to rein in sky-high inflation. It insists the Japanese economy still needs support and that consumer price gains in the country require firmer wage growth to bed in and enable a policy shift.

“I do not anticipate any changes to the BOJ’s policy settings this week,” said Alvin Tan, strategist at RBC Capital Markets in Hong Kong. “In fact, I am doubtful we will see any changes while Kuroda remains in office.”

BOJ’s Kuroda Determined to Maintain Stimulus as World Tightens

Here’s a look at the lie of the land in some key Japanese markets:

Swaps

Ten-year yen swap rates -- which are popular with international funds -- surged after the BOJ first intervened with extra bond purchases this year, breaking their close relationship with domestic yields. That’s indicative of overseas investors betting on a policy tweak in the future. But while rates are well past the central bank’s 0.25% line in the sand for 10-year bonds, they have dropped significantly since their mid-June highs, suggesting a paring of at least some of those views.

“If the BOJ were to tweak policy at this point, market players will see it as a surrender to pressures and the BOJ will put itself at the risk of facing continued market pressure asking for policy changes in coming meetings,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute. “I don’t think the BOJ will move.”

Bonds

Japan’s bond market has calmed down after the BOJ’s unprecedented intervention in June, which dragged benchmark yields back below their closely watched ceiling after a wave of speculative selling. The gap between JGB futures and their so-called cheapest-to-deliver underlying bonds -- a good gauge of the market dislocation at the time -- has narrowed to levels seen earlier this year.

“While the environment surrounding futures and CTDs may not see volatility pick up in the near term, one can’t say they have resumed normalcy,” said Katsutoshi Inadome, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “Expectations will probably linger over BOJ policy and it would be difficult to remove the view that JGB yields will stay elevated.”

Yen

Having fallen to a 24-year low, strategists are debating whether one of the year’s hottest macro trades -- sell the yen -- is overdone. A gauge of the dollar-yen’s expected direction over the next week via options pricing, suggests traders expect the pair to retreat.

“The market has been positioned for a hawkish surprise as the options market shows demand for dollar-yen downside,” a team at Bank of America including economist Izumi Devalier wrote in a note. “As the BOJ is likely to stay on hold and carry a dovish tone, we think dollar-yen can nudge higher.”

While this summer could mark peak yen weakness with commodity prices and US rates forecast to peak, it’s too early to buy the Japanese currency, they added.

Still, this week’s European Central Bank meeting might be even more important for the dollar-yen in the short term, as it is being strongly influenced by moves in the Dollar Index, according to RBC’s Tan. That gauge is heavily weighted toward the euro.

Stocks

Japanese stocks tend to take their lead from moves in other markets on BOJ day, unless the central bank comments on its exchange-traded fund purchasing policy. Ahead of this week’s meeting, fast-money traders have covered recent short bets and hold a neutral position, at least going by leveraged fund wagers on Nikkei 225 futures.

“There won’t be any negative impact on the stock market if the BOJ sticks to the current policy,” said Nobuhiko Kuramochi, market strategist at Mizuho Securities. “A weaker yen is providing a buffer for earnings. If the yen strengthens (as a result of surprise move by BOJ), that will be negative for stocks.”

(Updates euro move in thirteenth paragraph.)

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