The cost of dollar/yen options rose last week on mounting concerns that the Bank of Japan's plan to buy stocks from the country's ailing banks will lead to further instability in the world's second-largest economy. The move higher in implied volatility coincided with the dollar strengthening against the yen, bucking the recent trend that has seen vol fall when the dollar strengthens. Traders said one-month implied volatility rose to 11.5%, a full percentage point higher than the previous week, and the dollar jumped to JPY124 from JPY121.50.
"Traders looked at what the Japanese are doing, stepping in to buy stock, and largely speaking there is some instability associated with their plan," said one options trader in New York. Risk reversals, while still bid in favor of yen calls/dollar puts, also moved. The 25-delta risk reversal fell to 0.5 Wednesday from 1.5 vol at the start of the week.
Torsten Slok, a currency strategist at Banc of America Securities in New York, said while the Bank of Japan has the right intention, buying stocks from the country's banks will not solve some of the fundamental problems the economy faces. He noted the yen rallied when the plan was first announced earlier this month, but said investors have soured on the idea since then as details have emerged. "They're not taking the bull by the horns, because this will constitute a problem in the longer run." However, Slok said the short-term repatriation effect of buying Japanese equities should lead to a stronger yen, with spot moving to JPY112 in six months.
USD/JPY Spot & One-Month Implied Volatility
