The Yen got a boost yesterday after press reports suggested that the BOJ was moving towards ending its ultra-easing policy. But, it’s not surprising that many traders were a bit skeptical. It’s not the first time that the media had reported plans to start tightening, only for the BOJ to insist it was keeping with easing. So, is this time any different?

The thing is, the press reports aren’t exactly pointing to anything new. They suggest that the BOJ will move to end ultra-easing in the first quarter of next year, assuming there isn’t a major change in the economy’s direction.

The Old is the News

But, that’s already been widely telegraphed. The BOJ is running a study to see what the implications are of starting to tighten, and that study is expected to be concluded in March of next year. There is a pretty broad consensus expecting that study to show that raising rates would be optimal, so it’s kind of a given that the BOJ would start hiking in, or soon after, the first quarter of 2024. In fact, we talked about this as recently as late September.

So, the timeline hasn’t changed. The more important shift could be in the transparency, particularly since these rumors are circulating almost immediately after the BOJ announced it would effectively let bond yields move higher. Although technically not a change in policy, in practice it amounts to a degree of tightening.

Trying to Hit a Narrow Target

BOJ Governor Kazuo Ueda is trying to pull off a bit of a tightrope act. One the one hand, he’s trying to move things into a position where the BOJ can start tightening. On the other, he has to be very careful not to shock a market that has been living with negative rates for decades. Thus, the very subtle approach to shifting expectations around policy. Slowly opening the door to tightening while being extremely vocal about supporting easing for as long as needed.

But, now time is running out. Japan has had inflation above target for more than a year. The weaker yen might be helping the export industry, but it’s also driving up prices. And there are only four more months – one of which doesn’t have a BOJ meeting – before the expected date for lift off. It might just be that the time has come for the BOJ to not go so far as to hint that rates will go up, but at least not slap down suggestions that they will.

How Will It Affect the Markets?

The thing is, Ueda has been slowly dismantling the ultra-easing situation since he took the top job in April. He was widely expected to be the new leader that would move the BOJ into tightening. It’s just that it seems like he’s being way more cautious than anyone anticipated. That might have led some investors and traders to be a little too comfortable about their expectations for easing to last for a very long time.

The problem is that if the BOJ tips its hand too soon or too much, it could precipitate a sudden shift in the markets as traders want to anticipate the interest rate hike. This could cause the yen to strengthen substantially, and shock the Japanese economy. If the BOJ starts hiking while the rest of the world is holding, then the yen could appreciate considerably. When that will happen is still a mystery, and that is something that the BOJ for now seems keen on keeping shrouded in secrecy.

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