Core Viewpoint - The ongoing standoff between the Japanese government and the Bank of Japan regarding the weakening yen is reminiscent of last year's dramatic arbitrage trades and their eventual collapse [1][6]. Group 1: Government and Central Bank Standoff - The report from Nomura indicates that Prime Minister Fumio Kishida's government is effectively standing by, hoping the Bank of Japan will take action regarding the yen's depreciation and its impact on inflation [1]. - The Bank of Japan appears to be waiting for clearer signals from the government before making any moves [1][6]. - The current policy impasse has led to a decrease in market expectations for a December interest rate hike, dropping from a range of 50-60% to 46% [1]. Group 2: Historical Context and Market Dynamics - The current policy deadlock has investors recalling last spring's market dynamics, where a combination of shorting the yen and going long on Japanese stocks led to a significant rise in the USD/JPY exchange rate above 160 [3]. - Following an unexpected interest rate hike by the Bank of Japan in July 2024, these trades reversed sharply, causing the USD/JPY rate to plummet to around 140 [3]. Group 3: Risks of Inaction - Nomura's report warns that if the government and central bank delay action again, it could lead to a significant downturn in both the yen and Japanese stock prices when they finally intervene [6]. - The report emphasizes the importance of the government taking measures before speculative trading expands, as this could lead to a scenario similar to the July 2024 meeting where both the yen and stock prices fell sharply [6]. Group 4: External Pressures and Investor Sentiment - The report suggests that if the Japanese government maintains a non-interventionist stance, it may face increased external pressure, particularly from the U.S., which could lead to more pronounced verbal interventions [8]. - Despite a more than 3% rise in Japanese stocks as of October 20, foreign investors' buying activity remains subdued, with net purchases at only 58% of last summer's peak, indicating they have not exhausted their buying power [6][8].