USD/JPY Options Trading Volume Plummets Ahead of BOJ Decision

As investors await the Bank of Japan's (BOJ) policy decision on Thursday, seeking clues about the pair's future direction, trading volume in US dollar-yen options has plunged to a one-month low with scant turnover.

Data from the Depository Trust & Clearing Corporation shows that Monday's volume was the lowest this month, and Tuesday showed no improvement. This indicates limited market interest in one of the world's most liquid currency pairs. The pair's moves will also be influenced by the US Federal Reserve's policy decision later in the day.

Antony Foster, head of G-10 spot trading at Nomura Securities in London, stated, "USD/JPY hasn't been able to break through 153.30. We need to break through that level to get any upside momentum." The pair has recently faced resistance around 153.27.

The USD/JPY exchange rate has been fluctuating within a range since Sanae Takaichi won the Liberal Democratic Party leadership election earlier this month, paving the way for her to become Japan's next Prime Minister. Market expectations that her victory would mean looser fiscal policy and a potentially slower pace of rate hikes from the BOJ initially weakened the yen, but safe-haven buying stemming from trade tensions and verbal interventions have limited its decline.

Japan's Minister of State for Economic and Fiscal Policy, Minor Kihara, stated that Japan can increase its long-term potential growth rate by stimulating demand and maintaining a tight labor market, while also paying attention to the necessity of fiscal discipline. Kihara also stated that the government is closely monitoring the impact of exchange rate fluctuations on the Japanese economy.

While most economists expect the BOJ to keep interest rates unchanged at its first meeting under Sanae Takaichi's government, the market will carefully scrutinize the decision for clues about next steps.

One of the biggest uncertainties currently facing the BOJ is the shift in the Japanese political landscape. Given Takaichi's support for expansionary economic policies, this is giving investors the belief that rate hikes may be delayed.

On another note, although the US-Japan trade agreement has somewhat improved the trade outlook, BOJ officials are still waiting to see the full impact of higher tariffs on the Japanese economy. Regarding the economic outlook, the BOJ may not make significant revisions to its quarterly economic growth and price forecasts, but its caution about inflation risks is growing.

Ivan Stamenovic, head of Asia Pacific G-10 foreign-exchange trading at Bank of America, stated, "For the yen, market sentiment is geared toward caution, not aggression."