Forex traders complain that market liquidity in the dollar/yen, the world's second-most traded currency pair, falls to abysmal levels on days when the Bank of Japan announces its policy decisions, and they are blaming the central bank for that.
The BoJ has no pre-set schedule for its monetary policy announcements, unlike other major central banks. It also announces its decision as soon as one is reached. Since BoJ Governor Haruhiko Kuroda took the helm in 2013, policy announcements have been made between 11:41 am (0241 GMT) and 1:40 pm (0440 GMT). As a result, on March 15, for over an hour before the BoJ announced its decision at 12:35 pm, trading became razor-thin.
"From around 11:30 am, people simply stopped providing liquidity, and we saw crazy bid/offer spreads," said Masashi Murata, senior currency strategist at Brown Brothers Harriman. "I would wish the BoJ simply makes its announcement at a certain set time."
In the dollar/yen, the gap between the best offers and the best bids is normally around 1 pip, or 0.01 yen. But on March 15 the spread began widening from around 11:30 am, and increased to more than 20 pips. As liquidity thins, even a small amount of trading causes sizable price swings. That makes the market harder to read, and amplifies any potential losses from a wrong bet. On such days, many dollar/yen traders just refrain from trading for as long as it takes before the BoJ's decision.
By contrast, such protracted periods of illiquidity are not seen ahead of policy announcements by other major central banks. Last week in Europe, the bid/offer spread of the euro/dollar pair rose only slightly, and just less than 30 seconds before the European Central Bank's policy announcement.
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