BOJ preview – No Repeat of the Carry Trade Saga

The BOJ is closing out a turbulent year with its final meeting for the year. Most of us have fresh in mind the carry trade meltdown from August, which we think is very unlikely to repeat in the December meeting and yen risks are decisively to the downside.

Key differences to August in case BOJ hikes

While JPY would strengthen immediately, significantly, in our view it would not be a repeat of August for several reasons.

Positioning is much cleaner on JPY now than during the carry trade episode. Moreover, the fears over the US labor markets are not currently prevailing and the overall market drivers are decisively different (protectionism & inflation resurgence).

There’s also a risk BOJ hikes now and balances the message with overtly dovish guidance suggesting there won’t be a second hike, which would be a strong green light for the market to sell the JPY in the post-hike aftermath with the resurgence of inflation fears. We think this would be a policy error, but BOJ has had a habit of being over the top dovish (through 2023) and over the top hawkish (2022 Dec surprise and July 2024), so we would not discount it out.

In conclusion, we think JPY risks lie to the downside, and we see multiple paths for weaker Yen. There’s a chance Ueda remains relaxed about JPY weakness given its mainly vs the USD lately or that he simply pays lip service to further tightening which the market, again takes as a signal to take the JPY lower.

Fed impact

There’s a scenario where we can see the sustained weakness of the Yen in post FOMC and BOJ aftermath, putting the Japanese Ministry of Finance (MOF) in a very awkward position. We think there’s a risk MOF will be forced to intervene over the holiday season in the case of a hawkish Fed (2 hikes and focus on inflation risks) and dovish BOJ (non-committal about rate hikes).

If it comes down to it, we recommend taking a look for our intervention article here