Nomura has warned that the Japanese Ministry of Finance's playbook for intervening in the yen is undergoing a shift. The nature of recent market fluctuations suggests that officials may have escalated from verbal warnings to tangible tactical preparations, significantly raising the risk of intervention. According to trading desk sources, Nomura's team led by Yujiro Goto stated in a report on the 14th that although traditional intervention trigger signals have not yet flashed, investors should not be complacent. The sudden drop in USD/JPY during the UK trading session on Wednesday, occurring without any apparent positive news for the yen, is highly likely to have been a "Rate Check" conducted by the Ministry of Finance. This informal inquiry often serves as a prelude to actual intervention.
Is this a storm in a teacup? Has the prelude to intervention already sounded? On Tuesday, the market witnessed an anomalous plunge in USD/JPY during the UK session, unaccompanied by any obvious yen-positive headlines. Nomura analysts believe this was no coincidence. This price action closely aligns with so-called "Rate Checks," where the central bank contacts banks to inquire about exchange rate quotes, acting as a subtle warning: If today's sudden drop in USD/JPY was due to a rate check, then the Ministry of Finance may be on a higher state of alert. While we hold no strong view on the cause of this decline, if it is related to a 'Rate Check,' we need to be wary of the arrival of actual intervention.
Nomura specifically reminds investors to review history: on September 14, 2022, the Ministry of Finance conducted a "Rate Check," and merely eight days later, on September 22, the Japanese government executed an actual intervention amounting to 2.8382 trillion yen (approximately $19.8 billion). The rhyme of history is beginning to echo. Don't blindly follow the "Kanda Line": Autopilot mode is off. Many quantitative investors are still fixated on the so-called "Kanda Line"—a set of intervention warning indicators previously summarized by the market. However, Nomura's data shows that not a single observation indicator is currently flashing red. Does this mean safety? Nomura gives a negative answer: It is essential to avoid over-focusing on the 'Kanda Line.' Although no signals are currently lit, this does not mean the risk of intervention is low. Former Vice Minister of Finance for International Affairs, Masato Kanda, himself admitted that intervention decisions are not made on 'autopilot' based on these indicators.
This implies that the Ministry of Finance could launch a surprise attack at a moment when the market is completely unprepared, and mechanical reliance on models could lead to significant losses for investors. The front is expanding: Not just the dollar, keep an eye on the euro. The Ministry of Finance's scope of fire may be widening. Comments from the new head of foreign exchange affairs, Atsushi Mimura, reveal crucial information; he not only reiterated that "the worst thing is excessive market volatility" but more critically pointed out that the authorities are "not only watching USD/JPY but also various currency pairs." Mimura's comments effectively counter the market view that the Ministry of Finance is only concerned with the level of USD/JPY when intervening. It has been reported that the Ministry of Finance conducted a 'Rate Check' on EUR/JPY in July 2024. If true, then the Ministry of Finance indeed possesses alternative intervention tools, attempting to curb yen weakness without actually buying yen.
Nomura points out that as early as around 2000, Japan had intervened targeting EUR/JPY. In these turbulent times, investors who focus solely on the single battlefield of USD/JPY might be caught off guard by a flanking surprise attack.
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