RBC: Could The BoJ Sell USD/JPY?

RBC note that “JPY weakness this week was sufficiently extreme to prompt a bout of verbal intervention from Japanese Finance Minister Suzuki. The impact on spot was limited, but this raises two questions. Has the BoJ/MoF physically intervened to strengthen JPY in recent history? And if so, how close are we to them doing that now? The answer to the first question is yes - the BoJ sold USD/JPY several times in late 1997 and early 1998 when JPY was falling sharply with other Asian currencies, shortly after the Asian financial crisis. Although the background is clearly different in many ways, spot price developments suggest we are some way from the kind of pressure that prompted intervention at that time. From a very similar starting point a couple of years earlier, USD/JPY was testing Y130 at the time of the first intervention and Y135 at the second. We would also note that BoJ intervention was a fairly common occurrence in the late-1990s, unlike today. When the risk of BoJ selling JPY has been high in the past, we have used a probit model, based on previous intervention behaviour, to estimate the probability of BoJ intervention at a given time. If we assume the reaction function to JPY weakness and strength is symmetrical, we can use the same inputs to derive an estimate of the probability of intervention now. That estimated probability is still relatively low at 20% today. All-in-all, the risk of verbal intervention evolving into physical intervention is limited on the basis of USD/JPY levels and changes so far, but there is a precedent for the latter, which will bear watching if the recent moves extend much further.”