A lot has been written recently by us and others about the absolute collapse in volatility in financial markets. Whether stocks, bonds, FX or commodities, volatility is making multi-year lows, but the lack of volatility in the JPY/USD cross is among the most stunning of cases. As chart 1 below shows, the 1-quarter standard deviation of daily changes in the JPY/USD, at 4.5% annualized, is at the lowest level since 1977 and is less than half of the average volatility (10.2% annualized) experienced since the yen began to float in 1973. Because this volatility series displays no long-term trend and is nearly 2 standard deviations below average, we should expect the volatility of the JPY/USD cross to return the mean, which implies at least a doubling, at some point soon.
What a doubling of JPY/USD volatility would mean for other assets, then, is an interesting question. In chart 2 below we plot JPY/USD volatility against the VIX and observe a tight relationship over the last decade. A doubling of JPY/USD volatility would, therefore, likely coincide with a pickup in implied volatility of US stocks.