【介入政策の波及経路✨】Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is It Effective and Through Which Channel Does It Work?🌟BoJ Report No.1📚

This paper investigates whether official Japanese intervention in the JPY/USD exchange rate over the January 1999 to March 2004 time period is effective.

By integrating the official intervention data with a comprehensive set of newswire reports capturing days on which there is a rumor or speculation of intervention, the paper also attempts to shed some light on through which of the two channels, the signaling channel in a broad sense or the portfolio balance channel, effective Japanese intervention works.

The results suggest that Japanese intervention is effective during the first 5 years of the sample and ineffective during the last 3 months of the sample, thereby providing an ex-post rationale for why Japan intervened as well as for why the interventions stopped.

Moreover, the results suggest that when Japanese intervention is effective, it works through a portfolio-balance channel.

The results do not rule out that effective intervention also works through signaling.

Keywords: Exchange Rates; Foreign Exchange Market Intervention; Channels of Transmission

The literature on sterilized central bank intervention in the foreign exchange market is rich with conflicting and sample specific results in regards to whether intervention is effective in influencing exchange rates. 1

By contrast, there is little disagreement that if intervention is effective, it is effective through signaling (by carrying out intervention the central bank informs the market about its future policy intentions and/or fundamentals) or through portfolio balance effects (by carrying out intervention the central bank changes the relative demand and supply of imperfectly substitutable foreign and domestic assets).2


1: See Neely (2005) for a detailed overview of several recent intervention studies and their main results.

2: See, for example, Edison (1993) for a detailed exposition of the signaling and the portfolio balance channels

While the literature on effectiveness is extensive, fewer empirical studies investigate the transmission channels of intervention.3

The aim of this paper is to asses whether the recent 1999 to 2004 Japanese intervention is effective and to gain insight on through which channel effective intervention works.4

3: See Dominguez and Frankel (1993a) for a study of the portfolio balance channel.
See Fatum and Hutchison (1999) and Lewis (1995) for studies of the (monetary policy) signaling channe.

4: Official daily data on Japanese intervention from April 1991 to present is publicly available. As of January 2009, there has been no intervention in the JPY/USD exchange rate since March 16, 2004.

See Fatum and Hutchison (2006a) and Ito (2003) and others for studies of the effects of official Japanese intervention during the 1990s.

Specifically, the paper investigates whether Japanese intervention over the January 1, 1999 to March 31, 2004 time period is effective in influencing day-to-day changes in the JPY/USD exchange rate. 5

By integrating the official Japanese intervention data with a comprehensive set of newswire reports capturing days on which there is a rumor or speculation of intervention, the paper sheds some light on through which of the two channels, the signaling channel in a broad sense or the portfolio balance channel, Japanese intervention, if effective, works.6

5: Fatum and Hutchison (2005) show that Japanese intervention is sterilized.
Ito (2007) provides institutional details of Bank of Japan intervention.

6 Sarno and Taylor (2001) discuss, and Reitz and Taylor (2008) test, the coordination channel through which intervention works by sending a coordinating signal to the market regarding the “correct” or the equilibrium value of the exchange rate in the face of persistent exchange rate misalignments caused by non-fundamental influences.

The analysis presented in this paper does not distinguish between signaling in a narrow sense (e.g. signaling of the direction of future monetary policy) and signaling of information in a broader sense (e.g. coordination signaling in situations of non-fundamentals based exchange rate misalignments).