Foreign Exchange Intervention Policy: With or Without Transparency? The Case of Japan

This paper examines different aspects of transparency in the foreign exchange policy. More precisely, it analyses how transparency evolved over the last decades in Japan and how market participants reacted to the changes in transparency. For this, we create a dataset capturing the main features of the central bank policy and market perception from 1991 to 2004. Our results suggest that Japanese authorities adopted several changes in their policy, sometimes practicing transparency and sometimes ambiguity. These changes had contrasted impact on market perception: frequent statements revealing the preferences of the central bank regarding the exchange rate level confused the markets, while those designed to confirm an actual intervention reduced uncertainty. These results suggest that, in general, actual interventions should still be considered, provided that the authorities talk to the market and intervene in an appropriate way.