When Haruhiko Kuroda resigned from his post as Bank of Japan governor in April this year, he laid the groundwork for his successor, Kazuo Ueda, to try and make a change on the policy front. His departing words were that "Japan has made steady progress towards achieving its 2% inflation target".
While those words are now commonplace, they were not for many years as the Japanese economy battled against deflation. And when Kuroda made such comments, it got markets excited into thinking that change is afoot at the Bank of Japan.
But as we have come to know about Ueda's tenure so far, it has been nothing but disappointment for yen bulls in each and every important juncture this year. That saw USD/JPY rally all the way from 130 to 150, also helped out by soaring Treasury yields at the time.
It wasn't only until the turn to November that saw the pair start to fall back alongside bond yields, as traders also start to build up anticipation and expectation for an imminent policy shift by the Bank of Japan in the near future.
Right now, Japanese officials have guided markets to the spring wage negotiations in March and April next year to be that key turning point. The question is, will they actually end up delivering on that? Or will Ueda & co. end up being overly cautious in slow rolling the pivot away from ultra easy monetary policy?
I want to say that they will ultimately push for a change but at the same time, their credibility in doing so is perhaps being put on the line in a race against time as well. So, it's not going to be as straightforward as it looks.
That will make it extremely tricky to navigate the Japanese yen and for traders, there could be potential squeezes and unwinding in positions depending on how the Bank of Japan outlook develops.
For this year, it has been easy to stay long in yen pairs and USD/JPY in particular amid the positive carry. But for yen bulls, it is a painful exercise to hold such a heavy negative carry and to stick in such a position for an extended period. And until the Bank of Japan truly pivots from negative interest rates, it could end up still being the case for those optimistic on the yen currency in the early stages of next year.
It's all about the timing as they say and what may really deliver a blow to yen bulls would be another disappointment by Japanese officials, even after a strong result from the spring wage negotiations.
I wouldn't put it past the Bank of Japan to ultimately deliver a shift later on, even if they did not do so in March and April. But such a scenario will just add to the likely volatile and uncertainty that will surround the currency in just the first half of next year.
