(Bloomberg) — Just when the world is most craving clarity on the future of Japan's monetary policy, currency markets show it has become particularly hard to predict.
With so little consensus on what Bank of Japan Governor Haruhiko Kuroda will come up with for the Sept. 21 policy decision, Eaton Vance Corp. and a unit of Bank of New York Mellon Corp. are abstaining from any positions in the yen, while JPMorgan Chase & Co. says some investors have closed out bets on declines in the dollar versus the Asian currency. Such is the consternation that the options premium on contracts to buy the yen in a month's time disappeared for the first time since November, before reversing course this week.
Japan became the epicenter of a global bond selloff this month, amid speculation the central bank will pull back from buying long-term bonds after Kuroda ordered a comprehensive review of its easing program. The governor acknowledged last week that low long-term yields hurt returns on pension and insurance investments, even as he signaled there would be no reduction in easing. The Federal Reserve will decide on interest rates just hours after the BOJ's meeting, adding to the quandary about the yen's direction.
No position
"There is a chance that the yen weakens from these levels if the BOJ is more aggressive in new monetary easing than people expect, but getting the timing of that right is difficult," said Eric Stein, Boston-based co-director of global fixed income at Eaton Vance, which oversees about $330 billion. "Given the current risk-reward and all other variables in the world such as the trend in the dollar and U.S. rates, we don't currently have a position in the yen."
The currency, as well as the central bank, has the potential to surprise. Kuroda's shock announcement of a negative deposit rate on Jan. 29 weakened the yen only briefly, to the low for the year of 121.69 per dollar. After that it strengthened — reaching as high as 99.02 in June for the first time since 2013 after Britain voted to leave the European Union. The exchange rate was at 101.86 as of 6:55 a.m. in New York.
Just over half of economists surveyed by Bloomberg anticipate expanded easing next week, with a rate cut seen as the most likely option.
"There is an expectation that the BOJ might do something, but the problem is the market is mixed on what that might be or whether it's something new that we haven't even seen yet," said Laura Fitzsimmons, Sydney-based vice president for rates and foreign-exchange sales at JPMorgan, the world's second-largest currency trader. "Dollar-yen, if anything, probably has a slight bias higher still from these levels."
Mixed messages
Options traders are also sending mixed messages. The premium for contracts to buy the yen versus the dollar in one month, over the cost of those to sell, was at 0.5 percentage point Thursday, after largely disappearing from end-August through last week.
Shorter term they have turned more bearish, paying a premium of 0.8 percentage point for one-week contracts to buy the dollar against the yen over those allowing for sales. On June 22, the right to purchase the Japanese currency cost 4.5 percentage points, the most in more than seven years.
