When Yen Jawboning Isn't Enough, BOJ Rate Checks Loom: Primer

  • Traders can get asked for yen-rate quote, causing FX spike
  • Watch for any talk of rate checks when the yen is volatile

The recent strengthening in Japan’s exchange rate is intensifying focus on the reaction of the country’s policy makers, who can draw on a broad spectrum of options generated from decades of experience with currency volatility.

First up is so-called verbal intervention, and the yen has already responded this year to at least one such episode. On Jan. 20, the currency slid after an unnamed government official said authorities were closely monitoring the foreign-exchange market.

When volatility increases and jawboning may not be sufficient, the Bank of Japan can call traders asking for a "rate check" to see the price offer of the currency against the dollar. It’s a step short of actual yen sale, and can serve as a sort of warning for traders to avoid one-way bets.

If the BOJ wants to buy or sell, they’ll say "mine" or "yours" in response to a quote and will intervene in currency markets. If they’re merely checking the rate, they may say "never mind" or "nothing" before hanging up.

Speculation of rate checking often occurs when Finance Ministry officials are already talking about the yen, so an inquiry to traders about the rate can be interpreted as enhanced verbal intervention.

The BOJ is in contact with traders all the time, so a run-of-the-mill conversation about trends and rates in markets wouldn’t be regarded as a rate check.

With the yen strengthening sharply this week, Finance Minister Taro Aso has described the moves as "rough." His vice minister responsible for foreign exchange markets, Masatsugu Asakawa, said he is “watchful for speculative moves.”

Morgan Stanley warned after the yen climbed to a 15-month high on Tuesday that “some verbal intervention by Japan’s monetary and fiscal authorities becomes increasingly likely.”

Officials like to remain silent about whether they have done a rate check or not, making it difficult to verify.

The BOJ carries out any intervention in the currency market at the behest of the Finance Ministry. The last time Japan sold the yen to restrain gains was in 2011.

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