After a choppy summer, the Abenomics trade is working again as Japanese economic data has improved and USD/JPY is back to 100. Doubts that Abe's unconventional economic policy would be able to stoke demand are starting to fade a little as higher inflation expectations are also starting to stick: the consumer price index and five-year inflation swaps are at or near new highs.

Traders have already started to price a test of 101 or higher as more likely in short-term yen options, but the longer part of the curve has not responded yet. A two-month 25 delta risk reversal in yen futures options at the CME was recently -0.26% (call minus put IV), indicating that out of the money puts were more expensive than calls. But a six-month risk reversal was still priced positively, at 0.07%. If the trend from earlier in 2013 is to be any guide, another leg up in USDJPY should see those back month volatilities shift to match the rest of the curve.

We will start with a short call spread for now and may add 6J puts on a confirmed trend.

Trades: Sell to open 6J March 2014 0.0102 calls for $0.000132 and buy to open March 0.0103 calls for $0.000108.

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Trading one lot of this vertical call spread means risking about $950 to make $300 -- the initial credit received -- if the spread expires worthless. For traders with equity-only accounts, I can suggest a similar trade in the CurrencyShares Japanese Yen Trust(FXY) in the comment thread if there's interest.

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At the time of publication, Jared Woodard held positions in yen futures.