How long does BoJ tolerate JPY’s appreciation? Asset purchase seems most likely through JGBs and ETFs

You still see the heaps of bearish hedging interests when you have to see OTC adjustments in Yen currency crosses.

We think that not only the risks appear in euro zone matters for today's ECB monetary policy but the fear of broader global risks now appears majorly to outweigh worries about further ECB policy easing.

Given concerns over the limits of the policy arsenal at the BoJ and rising euro-centric risks, for now, the question is that can BoJ let yen gain further?

The BoJ is currently operating under the framework that base money expansion is the key to pushing up price pressures (and inflation expectations).

Trouble is that current programme of buying JPY80trn in assets hasn't done the trick (yet).

A faster pace of asset purchases thus seems likely (unless the BoJ is giving up on its basic operational framework, which seems unlikely for now).

We reckon that the BoJ would declare an extension of its annual purchase target to JPY90trn. A higher increment appears unlikely since it would bring closer even more quickly the point at which the BoJ would run short of assets to buy assets (mostly JGBs). But we also expect two important tweaks to the purchase programme.

First, the BoJ could double its buying of equity ETFs, raising the price of risk assets and opening a bigger pool of potential assets it may purchase over time. Could there be a tripling of ETF purchases from just over JPY3trn currently to JPY10trn? Possibly. But our forecast is a little more conservative, not least because of the increase in risk that ends up on the central bank's balance sheet by buying equity as well.

Although this doesn't really make a difference in monetary policy terms (though it signals greater readiness by the central bank to support risk assets).

The pressure is on to ease, and we expect more equity and bond purchases of 10 trillion yen, and move up our rate cut call 4Most of this already appears baked into market expectations, not least USDJPY, which has risen sharply in the last several days.

However, to be safer side we would still recommend initiating short EURJPY positions for long-term hedging but by capitalizing on every short-term upswing, preferably via options ahead of this ECB meetings.

Despite acknowledging the recent uptick in the implied volatility of Euro crosses, especially EURJPY with higher negative risk reversal is justifiable when you have to observe the spot curve of this pair (see IV and RR nutshell and compare this with spot prices).