The recent strength in the Japanese yen has in part to do with a stronger correction after the sharp fall in the currency itself in the past few months. But I would argue that a part of that also seems to do with some hawkish speculation surrounding the BOJ later this month.

And that definitely heightens the risks and potential volatility surrounding the central bank decision. In other words, it looks like there are certain quarters in the market that is looking for the BOJ to announce a tweak of sorts to its existing policy. It will be a bit of a “surprise” at least, since policymakers have not steered the conversation in that direction whatsoever.

However, let’s take a look at the signs in the market.

JGB 10-year yields (%) daily chart

First up, we have JGB 10-year yields continuing to rise towards the 0.50% threshold, especially with a strong jump last week. That’s arguably a signal that speculation is intensifying – similar to what we have seen previously in the asset ahead of key BOJ decisions.

2-week FX volatility (USD/JPY vs EUR/USD)

In the final week of July, we’ll have decisions for the Fed, ECB, and BOJ. And the 2-week FX volatility now encompasses those decisions. But as you can see in the case of EUR/USD (purple line), the jump in implied volatility isn’t as much as what we are seeing in USD/JPY (orange line).

That signifies that traders are more fearful about the BOJ decision rather than the ECB decision, and I would argue similarly for the Fed as well. The benchmark for other dollar pairs are not seeing as big a jump as compared to USD/JPY, but there’s also the argument that the pair involves two key central bank decisions.

In any case, the heightened volatility implications does highlight that there is going to be a big focus on the BOJ decision as well – especially if speculation stays heightened surrounding a tweak to the BOJ’s yield curve control policy.