Financial authorities in Japan, specifically the Ministry of Finance and the Bank of Japan have been making ‘verbal intervention’ statements in recent months as the yen has depreciated. Authorities do not want the currency to decline rapidly and use the comments to slow its drop.

However, at some stage, if the yen falls too far for comfort, there will be actual intervention, in the form of selling USD/JPY. There may be some cross-selling but the bulk of intervention will be in USD/JPY.

In October 2022 the Ministry of Finance instructed the Bank of Japan to sell USD/JPY, actual intervention. In the weeks leading up to this there were warnings from authorities. These have gradations. I posted back in early June a guide to how these warnings escalate:

I’m adding a little more now, as we are getting closer to levels of concern.

Watch for words like “undesirable”, “rapid”, and “not reflecting fundamentals”. For example:

• sudden/abrupt/rapid movements in exchange rates are undesirable
• markets that aren’t reflecting economic fundamentals are undesirable

As an escalation of statements, watch for “one-sided”, “excessive”, and “speculative moves”. For example:

• FX moves have been speculative
• yen movement is a speculative activity
• yen moves have been one-sided, moves have been excessive

Further escalation is indicated by the warning of action to come, and is the time to be prepared for actual intervention:

• won’t rule out any options
• ready to take action at any time
• we could conduct stealth intervention
• we are on standby

The next step is what is referred to as a “rate check”. This is when the Bank of Japan contacts FX dealers at banks and asks for a dealing level in USD/JPY. Dealers quote the Bank a two-way price, a bid, and an offer. This is a bit of a charade as everyone knows what’s going on, the BOJ is intervening by making a threat of intervention. While this is going on dealers will contact other banks and sell USD/JPY heavily, in effect ‘front running’ the BOJ. This is what the BOJ wants to happen, it’s a form of intervention without buying any yen and selling USD (from reserves).

The next step is actual BOJ USD/JPY selling. This follows a rate check, maybe by weeks, maybe by days, maybe by only hours. Instead of just asking for a two-way price, i.e. checking the rate, the BOJ will get the price and then deal on it, selling USD/JPY to the dealer. the banks dealer will then get out of that position as best he or she can, all the while trying to sell extra because the BOJ is in the market slamming USD/JPY lower and there is money to be made. the effect is cascade of USD/JPY selling, driving it lower. Intervention.