Impact of Yen Intervention

Many people, including the governor of the central bank of South Korea, claim that unilateral BOJ intervention will not work. And yet it has. Without repeating its operation, the yen remains pinned near the intervention-inspired lows.

In addition to the spot market reaction--the developments in the options market suggest another dimension of the BOJ success (thus far). Implied volatility has fallen from about 12.7% prior to the intervention to 11.2% today. This is the lower end of where 3-month dollar-yen vol has traded in the past four months.

On the other hand, spread between yen calls and yen puts equi-distant from the forward strike (risk reversals) show that since the intervention has moved in the favor of yen calls (dollar puts). Before the intervention, yen calls (dollar puts) were at a discount of more than 2% and now the discount is about 1.4%. This is the smallest discount since early May.

It is not immediately clear why there is a greater demand for yen calls (dollar puts) after the intervention. It could reflect a skepticism-- that the intervention will not have a lasting impact. Participants who do not want to get caught by another round of BOJ intervention could be expressing thier views in the options market. Alternatively, it could reflect some positioning for the new fiscal half year that begins Oct 1. We note that yen calls were better bid ahead of the fiscal year end on March 31 as well.