The Bank of Japan convenes tonight, early on July 29th, and this will definitely be a monumental decision for markets. The stakes are high after a big buildup.

The government led by Shinzo Abe faced the electorate in early July and won more seats in the Upper House. From that win on July 2nd, talk of fiscal stimulus began flowing. The numbers floated between big packages worth 20 to 30 trillion yen and small ones in the single digits of trillions.

High expectations pushed USD/JPY higher and low expectations sent it down. All in all, USD/JPY has risen from the post-Brexit lows of around 100 and traded recently in wide ranges. Support awaits at 104 and resistance at 107.50.

And it’s very likely that the pair will break from this wide 350 pip range.

But to which direction?

Helicopter Money

BOJ governor Haruhiko Kuroda and also PM Abe met with former Fed Chair Ben Bernanke. The bearded central banker coined the term “helicopter money” back in the early 2000s and speculation rose for implementing this policy in Japan, a country that pioneered unconventional monetary policy.

What does helicopter money mean? It depends on who you ask. It could mean handing money in the hands of consumers or directly monetizing the debt by having the central bank buy government bonds out of markets and thus finance extraordinary fiscal spending.

In this case, USD/JPY could shoot higher, easily trotting above 110 and perhaps returning to the previous levels of 120 and beyond.

Helicopter money in various forms could do the work for Japanese policymakers. More spending in any form would trigger growth and even inflation. And it could even go out of control. Japan could get more than it wishes for: high inflation further down the road.

Here is an interview I gave to Dukascopy TV, explaining the situation of USD/JPY and refering to this:

But this is not the only option.

Big disappointment?

In April, there were high expectations for significant monetary policy. The reports and rumors came from various sources. However, the BOJ fell short of expectations and announced small technical changes. The yen surged and USD/JPY crashed.

This could be seen once again. It could be a question of timing: such extreme monetary policy would trigger criticism from Japan’s trading partners: the US and China. The world’s No. 1 economy is in the midst of an election campaign in which anti-trade sentiment is thriving. Such a policy could be seen as getting a bad deal from Japan. A much better timing would be after Americans go to the polls on November 8th.

Also for China, the world’s No. 2 economy and a neighbor of Japan, this could be problematic. China has been devaluing its currency after Brexit. They could accelerate the move.

What will the BOJ do?

That remains an open question, but the tendency here is for a disappointment: a package of more QE and perhaps an adjustment of the interest rate but no chopper. In this scenario, the yen could certainly strengthen.

In any case, we will know soon enough. And the timing of the announcement is also a bit unknown. Normally the announcement comes out between 2:00 and 5:00 GMT. The Bank of Japan also releases its outlook and its own Core CPI at 5:00, so it is safe to assume the announcement will come before this time.

At around 6:30 GMT, Governor Kuroda will hold a press conference. And next week we will hear from the government.