Let's not kid ourselves. This one was easy.
Think about it. I mean you knew it wasn't going to depreciate if the BoJ nudged rates further into negative territory. After all, we already know the market views NIRP in Japan as a policy mistake and an act of desperation. More NIRP would be interpreted the same way.
As a reminder, here's what happened when Kuroda announced negative rates in late January:
You also knew the Fed wasn't going to move after the May jobs debacle. Everyone knew that. But the BoJ really needed that Fed hike. Had the Fed raised rates, Japan could have eased simply by doing nothing. Fed policy would be tightening, so Japan on hold would be easing by default.
But not only did the Fed not hike, it also actually came out doves-a-blazin' in the statement and subsequent presser. That meant either Kuroda fires some kind of easing nuke, or there would be a lot of upward pressure on the yen overnight.
Perhaps most importantly, the yen is a safe haven asset and it's been bid all week long on Brexit fears.
The only possible way for the BoJ to keep a lid on the appreciation would have been for Japan to commit to more ETF purchases, but it's certainly debatable whether that would have ultimately offset the factors listed above especially as investors flock to safety ahead of the Brexit vote. Plus, it really needs to be careful with the stock buying, considering i) how much of the market it already owns, and ii) the sheer size of its ETF book. It's a top 10 holder in 90% of the Nikkei. What happens if it sells? Or worse, what happens to its balance sheet if other people sell? You can't mark your equity book "held-to-maturity."
Anyway, the point is, this was a no-brainer (not to say "I told you so," but...). The question now is: when does Japan intervene?
Recall that last month, following the BoJ's April meeting, FinMin Taro Aso suggested he would not hesitate to step in should moves in the yen continue to be "one-sided." Here's what he meant by "one-sided":
Well, things have gotten "one-sided" again, and given the uncertainty surrounding next week, one wonders whether this might not be a good time to bet in the opposite direction (i.e., to bet on an intervention). Have a look at the following chart from Citi:
As you can see, it's intervened around the three-year moving average pretty consistently. Well, we're there now, and unless we get some definitive sign tomorrow or over the weekend that most of the UK has swung firmly back into the "stay" camp, there aren't a whole lot of reasons why JPY can't push towards 100.
With that in mind, let's look briefly at how much the yen could potentially appreciate (and thus how much pressure there would theoretically be on Japan to intervene to force depreciation) in the event next week's UK referendum goes the way of the "leaves." Here's Goldman:
If there is a vote to leave the EU and uncertainty increases as much as it did after the Lehman collapse, we estimate that Sterling could weaken by about 11% in trade-weighted terms versus a basket of major DM currencies. In response to the same shock, the Euro could depreciate by around 4%, while the Yen could appreciate by about 14%, the Swiss Franc by 8% and the Norwegian Krone by 3%. Exchange rates would move much less if the shock were comparable to that which occurred in September 1992, when Sterling came under pressure and the UK government was forced to withdraw the currency from the European Exchange Rate Mechanism (ERM).
Here it is graphed (left pane) along with a bar chart (right pane) that shows the effect a shock would have on exchange rates vs. USD:
Also, remember that although Treasury Secretary Jack Lew has generally been keen on vocalizing his displeasure at the idea that Japan would intervene to depreciate the yen (he called the moves in late April "orderly" at the G7), one of a cynical persuasion might be tempted to suggest that Lew would rather the Japanese intervene than not. Why? Simple: when the carry unwinds, US stocks fall.
On that note, I'll leave with a rather amusing quote from Bloomberg's Richard Breslow:
I'm waiting for U.S. Treasury Secretary Lew to call up the Japanese and implore them to intervene in the yen. Orthodoxy will go right out the window if equities are threatened.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.