Changes in Risk Perceptions on Yen Interest Rates and Exchange Rates Observed in Options Markets: Developments in Implied Probability Distributions amid Rate Hikes in the United States and Europe from 2022 to 2023

In this paper, we extract the implied probability distributions from daily option prices for the future levels of yen swap rates and the U.S. dollar/yen exchange rate, which came under upward pressure amid rate hikes by central banks in the United States and Europe from 2022 to 2023, using data through the end of 2023. The extracted implied probability distributions allow us to understand the overall picture of market participants' risk perceptions, which cannot be captured by other simpler indicators such as risk reversal. The results suggest that caution about a higher interest rate increased significantly in the yen interest rate swaps market toward the middle of 2022, as overseas interest rates rose. Such caution further heightened after the Bank of Japan decided to expand the range of 10-year Japanese government bond (JGB) yield fluctuations from the target level at the Monetary Policy Meeting (MPM) held in December 2022, but subsequently eased. In the U.S. dollar/yen market, caution about future yen depreciation heightened toward fall 2022 as the yen weakened. However, when the yen weakened against U.S. dollar again to around the same level in fall 2023, market participants did not become as cautious as in fall 2022 about the future yen depreciation.