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20 December 2022 in Tokyo: the BoJ widens its yield band and USDJPY drops about 7 yen

Meetings that always end in no change can still surprise. On 20 December 2022 Tokyo time, the Bank of Japan widened the range for its 10 year bond yield from about plus or minus 0.25% to about plus or minus 0.5% around its 0% target. Short rates stayed at minus 0.1%.

Almost nobody expected it. The consensus was that nothing would change until Governor Kuroda's term ended in April 2023. Kuroda described the move as meant to improve bond market functioning, not a rate hike. The 10 year JGB yield jumped to about 0.46%.

The BoJ doesn't publish a fixed release time. The statement comes out when the meeting finishes, which is usually around midday in Tokyo and the early morning in London.

USDJPY had been near 137.9. Reuters reported the dollar down 3.9% against the yen at 131.655, on pace for the yen's biggest one day rise in 24 years, with a low of 130.58. High to low that's about 732 pips.

One lot of USDJPY pays 1,000 yen a pip, so 732 pips is 732,000 yen, roughly $5,560 at those levels. A long with a 20 pip stop ($152) didn't lose $152; it lost whatever the first available fill gave.

The 0.25% cap had been in place since 2021, which is why a change to it counted as a shock. Predictability in the policy was the position everyone was holding.

That day was a reminder that a BoJ meeting is never truly risk free. The announcement came around midday Tokyo time, and USDJPY dropped hard within minutes. Liquidity was decent since it was during the Tokyo session, but the move was so one sided that limit orders on the other side were swept quickly. I avoid holding yen positions through BoJ meetings now, even when consensus says no change.

A two sentence version of yield curve control helps with the story. The BoJ promised to buy any amount of 10 year bonds at a fixed price whenever yields reached the cap, which was 0.25%. That kept yields pinned while other countries' yields were rising, and the yen weakened because Japanese rates stayed near zero. Widening the band to 0.5% moved the BoJ's fixed price offer up to that level, so yields could rise further before it stepped in, and they did, to about 0.46% that day. Higher Japanese yields made yen assets relatively more attractive, and the yen rose. It wasn't a rate increase on paper, but markets treated it like the first step of one.

Price-wise, the yen's one day gain was the largest in 24 years, per Reuters. The move from about 137.9 to the 130.58 low is over 7 yen. FXCM's note had it down 2.6% at 133.27 at one point, so the figure you read depends on the time you looked, since the Tokyo spike was followed by London and New York trading. A swing of this size changes the dollar value of a yen pip: at 137.9 one lot pip is $7.25, and at 131.6 it's $7.60, a 5% increase in pip value just from the price move.

Surprises like this don't come from the calendar, so some desks use a volatility trigger rather than a schedule. The idea is simple: compare the current M1 range with the median of recent M1 ranges. For USDJPY in a normal Tokyo session that median might be around 3 pips. If a single minute prints 15 pips, five times the median, stand aside for a set time such as 15 minutes and let the spread settle. It's a crude filter and it will trigger on ordinary news too. Its job is to cover the occasions where nothing on the economic calendar explains the move.

The BoJ holds 8 policy meetings a year, and every one of them is a scheduled event with an unknown time. That's a different risk from, say, US payrolls at 13:30 London. On BoJ days the practical choices are to be flat from the Tokyo open until the decision appears, or to accept that a stop may not fill near its price. For a scalper in London, the window of exposure is early, from about 00:00 UTC until the statement, often 03:00 UTC. Marking all 8 dates in a calendar and treating the whole Tokyo session as event risk costs about 8 mornings a year.

Each morning in Japan, a daily reference rate for USDJPY gets set around 9:55 Tokyo time. Many Japanese corporates and banks settle customer orders against it, so a lot of dollar demand or supply gets concentrated into the minutes before.

On a chart, that shows up as a drift or a push in the half hour before 9:55, followed by a pause or a reversal afterwards. Not every day, and not by the same amount, but often enough that regulars on the pair watch for it.

The direction depends on the balance of orders. Importers needing dollars push the pair higher. Exporters converting dollars push it lower. Around month-end, quarter-end and certain payment dates, the imbalance can be large.

For a scalper, a few things follow. The spread on USDJPY is usually tight in Tokyo hours, which helps. The pair is likely to be more directional into the fix and more erratic after it. And the typical size of the move is a handful of pips, which fits scalping targets well.

The risk is that fix flows are not the only thing happening. A data release or a surprise from the central bank can overpower them, and a trade based on fix expectations gets run over.

Plotting the average path of USDJPY from 9:00 to 10:30 Tokyo time over the last few months gives a quick impression of whether there's a pattern worth building a rule around.

Has the Tokyo fix produced anything tradable on USDJPY, or does it get lost in the noise?