Prelude to yen intervention emerges; market may face a "surprise attack," closely watch the "rate check."

Nomura warns that the Japanese Ministry of Finance’s rules of the game for yen intervention are changing. The nature of market volatility suggests that officials may have escalated from verbal warnings to substantial tactical preparations, and the risk of intervention has risen significantly.

According to Wind Chasing Trading Desk, Yujiro Goto’s team at Nomura stated in their report on the 14th that although the traditional signals for intervention have not yet been triggered, investors should not be complacent. On Wednesday, during the UK trading session, USD/JPY suddenly dropped without any apparent positive news, which was most likely due to a “rate check” by the Ministry of Finance. These informal inquiries often precede actual intervention.

Waves Without Wind: Is the Prelude to Intervention Sounding?

On Tuesday, the market saw a mysterious plunge in USD/JPY during the UK session, with no obvious yen-positive headlines accompanying it. Nomura analysts believe this is no coincidence. This price action closely matches the so-called “rate check,” where the central bank calls banks to ask for exchange rate quotes, serving 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 higher alert.

Although we don’t have a strong view on the cause of this drop, if it is related to the ‘rate check,’ we need to be alert to possible actual intervention.

Nomura especially reminds investors to look back at history: On September 14, 2022, the Ministry of Finance conducted a “rate check,” and only eight days later, on September 22, the Japanese government implemented an actual intervention worth 2.8382 trillion yen (about $19.8 billion). History is rhyming again.

Don’t Rely on the “Kanda Line”: The Autopilot Mode Is Off

Many quantitative investors are still watching the so-called “Kanda Line”—a set of intervention warning indicators summarized previously by the market. However, Nomura’s data shows that none of these observation indicators are currently flashing red. Does this mean safety? Nomura gives a negative answer:

Be sure to avoid excessive focus on the ‘Kanda Line.’ Although there are no signals flashing now, that doesn’t mean intervention risk is low. Former Financial Officer Kanda himself has admitted that intervention decisions are not made on ‘autopilot’ according to these indicators.

This means the Ministry of Finance could launch a surprise attack when the market is totally off guard; mechanically relying on models may result in investors suffering losses.

Expanding Battlelines: Not Just the Dollar, Watch the Euro

The Ministry of Finance’s firepower may be expanding. Comments from new FX chief Jun Mimura revealed key information: not only did he reiterate that “the worst is excessive market volatility,” but critically, he noted authorities “are not only watching USD/JPY, but also various currency pairs.”

Mimura’s comments effectively refute the market view that the Ministry of Finance is only concerned about USD/JPY levels during intervention.

Reportedly, the Ministry of Finance conducted a ‘rate check’ on EUR/JPY in July 2024. If true, the Ministry 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 in EUR/JPY. In this turbulent season, investors who focus solely on USD/JPY may be caught off guard by flanking attacks.

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