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Weak Yen Amplifies Price Pressures, USD/JPY 1-Week Implied Vol Soars Pre-BoJ


No material reaction in USD/JPY to Japanese inflation data, as core CPI rose 3.0% Y/Y in September, matching expectations. The government said that core inflation, excluding the impact of the sales tax hikes, was fastest since August 1991.

  • Sharp depreciation in the exchange rate is fanning inflation by increasing the cost of imported goods. The impact of USD/JPY was reflected in another strong outturn for imports yesterday. Elsewhere, Yomiuri cited estimates suggesting that if USD/JPY stays at Y150, the additional burden on an average household in FY2022 will be Y86,462 versus FY2021, even if fiscal relief measures are factored in.

Fig. 1: Japan Imports Y/Y vs. USD/JPY

Source; MNI - Market News/Bloomberg

  • Recent BoJ communique showed no deviation from the view that powerful monetary easing is here to stay, with prices driven by cost-push factors rather than meaningful wage growth. The Policy Board will review its monetary policy settings next Friday and is expected to stand its ground.
  • Still, rapid yen depreciation, upward pressure on JGB yields, and the political cost of rising living costs are testing the limits of the BoJ's ultra-loose policy. Japan's 10-Year swap rate sits near its highest point since early 2014, the era before negative interest rates.
  • Resultant uncertainty about the BoJ outlook (including approach to FX matters) is reflected by a surge in USD/JPY 1-week implied volatility this morning, which has topped 16% for the first time since Sep 22. Longer-end vols have remained fairly steady, as 1-week/1-month and 1-week/1-year spreads plunged into negative territory.

Fig. 2: USD/JPY 1-Week/1-Month Implied Volatility Spread

Source: MNI - Market News/Bloomberg

  • Spot USD/JPY last deals at Y150.19, a touch higher on the day. Familiar technical contours remain in play. Comments from Japanese officials are hitting the wires as we type, offering little in the way of fresh insights.

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