Analysing the USD/JPY & JGBs Sell Off from a Macro POV
Analysing the trade scenario for the BOJ pivot and the role the Dollar will play in the Japanese Yen
Hey Crew,
It’s been a beautiful week.
“Keep swinging the bat” —some advice I received a few weeks ago when I sat with a mentor of mine. Decades in the City & Wall St, accolades upon accolades, his secret was just that. “In the trenches, swinging the bat”.
So my words of wisdom today, is to keep swinging that bat. Keep working, keep pushing & chasing what you want.
Anyways, Hajime Takata, a BOJ policy board member, held a speech in the early hours of the morning, triggering a sell-off in JGBs and USD/JPY. So let’s break down his comments and the data supporting the policy pivot.
As always, I aim to inform and educate you to expand your area of understanding, so let’s begin by breaking down the framework governing the BOJ.
The Monetary Policy Board
The Policy Board of the BOJ, seen in Figure 1, is the main decision-making body responsible for implementing monetary policy in Japan.
The Policy Board consists of nine members, the Governor (Kazuo Ueda), his two deputies ( Himino Ryozo and Uchida Shinichi) and the remaining six members of the policy board.
I expect this visual representation of the hawk/dove scale doesn’t come as a surprise as we know the extreme dovish stance of the central bank. However, early this morning Hajime Takata held a speech saying that the bank’s price target has finally come into sight. Takata added that exit measures should include abandoning of the yield curve control mechanism, exiting negative rates and committing to overshoot inflation targets.
Why are his comments so important?
Typically, hawkish policymakers' comments are seen as reflecting their established, more hawkish view of the economy. However, when a previously neutral board member publicly acknowledges that the inflation "target is finally coming into sight," it signifies a significant shift in sentiment among BOJ policymakers, suggesting they believe the economy is now ready for higher interest rates.
The second reason, this statement nullifies the concerns over Japan tipping into a technical recession. If the BOJ were concerned in one shape or form the BOJ would cease to mention rate hikes and focus on stimulating growth and demand much like its Asian counterpart China.
Market reaction
This is how markets reacted to his comments:
The Yen gained 0.50% against the dollar as USD/JPY fell just over 100pips by the European Open open 07:00. JGBs (Japanese Government Bonds) traded heavily after the speech as investors shorted JGB futures in anticipation of higher BOJ policy rates.
The Macro View
For all technical traders aiming to incorporate macro into your strategy, or just broaden your understanding and awareness to be able to find positions this next section will be key for you. Particularly “The trade” section.