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The yen has erupted higher more recently than that (up 16% vs USD and 25% against GBP in 1H 2016 for example). That’s a reminder that when a currency is as cheap as the yen (USDJPY PPP is at 103 according to the OECD) it can spike pretty sharply. It is kept at current undervalued levels by the commitment of the BOJ to target a 2% inflation rate and anchor bond yields.
We see only a small chance of that commitment waning in 2018 because the inflation rate won’t get anywhere near 2%, but the net result is a huge skew in the range of outcomes for the USDJPY
The election of Shinzo Abe as Prime Minister of Japan brought the BoJ into the fray
Why shorting USDJPY 1y skew: In selling downside strikes, buying USDJPY puts is paying for the negative skew of low strikes. As we don’t see USDJPY collapsing below 100, we do not need to buy the full downside. So, we also finance our puts by selling the downside skew via put spreads.
In setting a topside knock-in: Near-term, USDJPY should be initially mildly supported by mounting US yields. This suggests conditioning medium-term put spreads by a topside knock-in.
Such a barrier will cheapen the vanilla trade, as the bearish skew discounts the market-implied probability of bullish moves.
