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Front-End Vols Bid as Markets Capture BoJ Event Risk

JPY
  • JPY vols suitably bid ahead of the Tuesday BoJ decision, with overnight implied marked higher to 17 points, nearing the best levels of 2024 and implying a ~105 pip swing over the decision – around double the swing implied average background vol this year.
  • The uptick in vols comes despite consensus looking for no change this week - our preview writes that while the BoJ are anticipated to normalise policy in 2024, such adjustments are not anticipated this week, and are more likely to tighten policy at the April meeting, coinciding with the release of the next Quarterly Outlook Report.
  • So what could move markets in the wake of the decision? Particular positivity surrounding the Shunto wage negotiations in April, or a particularly sharp uptick in core CPI estimates for 2024/25 would solidify expectations of Q2’24 tightening and could work in favour of JPY strength.
  • Nonetheless, this is not the base expectation, with the Noto Peninsula earthquake still under consideration, and lack of clarity on wages arguing in favour of no change. Particular pessimism on this front would prove JPY negative, and 148.80 will be eyed as the initial upside level – comfortably captured by the options-implied swing in spot.
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