Japan’s financial authorities, specifically the Ministry of Finance and the Bank of Japan, have issued “verbal intervention” statements in recent months as the yen depreciates. The authorities do not want the currency to depreciate quickly and use the comments to slow it down.
However, at some point, if the yen falls far from comfort, there will be actual intervention, in the form of USD/JPY selling. There might be some cross selling but the bulk of the intervention will be in USD/JPY.
In October 2022, the Ministry of Finance instructed the Bank of Japan to sell the USD/JPY pair, de facto intervention. In the weeks leading up to this, there were warnings from the authorities. These have gradations. Back in early June, I posted a guide showing how these warnings escalate:
I’m adding more now, as we approach anxiety levels.
Watch for words like “junk,” “quick,” and “don’t reflect the essentials.” For example:
- Sudden/sudden/rapid movements in exchange rates are not desirable
- Markets that do not reflect economic fundamentals are undesirable
As an escalation of statements, watch for “one-sided,” “excessive,” and “speculative” moves. For example:
- Forex movements were speculative
- The movement of the yen is a speculative activity
- Yin’s moves were one-sided, and the moves were excessive
Further escalation is indicated by a warning of upcoming action, which is the time to prepare for actual intervention:
- It will not rule out any options
- Ready to take action at any time
- We can conduct a stealth intervention
- We are on standby
The next step is what is referred to as a “price check”. This occurs when the Bank of Japan contacts banks’ forex dealers and requests a USD/JPY trading level. Traders quote from the bank a two-way price, the bid and the offer. This is a bit of a charade as everyone knows what’s going on, and the Bank of Japan gets involved by threatening to intervene. While this is happening, traders will reach out to other banks and sell the USD/JPY pair heavily, in effect an “advance” for the Bank of Japan. This is what the Bank of Japan wants to happen, it is a form of intervention without buying any yen and selling US dollars (from reserves).
The next step is to actually sell the USD/JPY pair. This is followed by a price check, maybe by weeks, maybe by days, maybe just by hours. Instead of just asking for a two-way rate, i.e. checking the rate, the Bank of Japan will get the rate and then manipulate it, selling USD/JPY to the trader. The bank trader will then exit this position as best he can, all the while trying to sell more because the BOJ is in the market USD/JPY is falling and there is money to be made. The effect is a series of sell-offs in the USD/JPY pair, causing it to drop. to intervene.
Japanese Deputy Finance Minister for International Affairs Kanda. It is the Ministry of Finance that will ask the Bank of Japan to intervene. Kanda was responsible for doing so. You’ll often see me refer to Kanda in publications as the “Yen’s intervention man.” Other references to him include “Japan’s highest currency diplomat”.