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Secrecy of Bank of Japan's Yen intervention: Evidence of efficacy from intra-daily data

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  • Kim, Suk-Joong
  • Le, Anh Tu

Abstract

This paper examines the intraday effectiveness of the Bank of Japan (BOJ)'s foreign exchange interventions over the period May 13, 1991-March 16, 2004. The existing literature has generally failed to provide a comprehensive study on the effects of the BOJ's interventions, and particularly, the efficacy of public and secret operations. By dividing a 24-h trading day into three horizons, we show that the intraday evidence on the effects of official interventions documented in prior studies primarily came from publicly known interventions. In the case of secret interventions, although there were no clear impacts on the first moment of exchange rate returns, we found significant second moment responses. Specifically, covert operations were able to reduce the Yen/USD return volatility during both Tokyo and subsequent overnight market hours. Furthermore, our extended model on secret interventions reveals that when the BOJ completely concealed its transactions, undetected interventions were shown to be most effective in both reversing undesired trends and reducing excess return volatilities. On the other hand, those interventions that were rumoured were not as effective. Finally, the interventions conducted during the periods of 'oral interventions' were in general more effective in moving the exchange rate in the desired direction.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 24 (2010)
Issue (Month): 3 (September)
Pages: 369-394

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Handle: RePEc:eee:jjieco:v:24:y:2010:i:3:p:369-394

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Web page: http://www.elsevier.com/locate/inca/622903

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Keywords: Yen intervention Secret and public interventions Bank of Japan;

References

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  1. Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2690, C.E.P.R. Discussion Papers.
  2. BEINE, Michel & LAURENT, Sébastien & PALM, Franz C., . "Central bank FOREX interventions assessed using realized moments," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2135, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Fatum, Rasmus & Hutchison, Michael M., 2003. "Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan," Santa Cruz Department of Economics, Working Paper Series qt2883n7z5, Department of Economics, UC Santa Cruz.
  4. Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(5), pages 779-793, September.
  5. Priscilla Chiu, 2003. "Transparency versus constructive ambiguity in foreign exchange intervention," BIS Working Papers, Bank for International Settlements 144, Bank for International Settlements.
  6. Kim, Suk-Joong, 2007. "Intraday evidence of efficacy of 1991-2004 Yen intervention by the Bank of Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 17(4), pages 341-360, October.
  7. Dominguez, Kathryn M.E., 2006. "When do central bank interventions influence intra-daily and longer-term exchange rate movements?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(7), pages 1051-1071, November.
  8. Ito, Takatoshi & Yabu, Tomoyoshi, 2007. "What prompts Japan to intervene in the Forex market? A new approach to a reaction function," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(2), pages 193-212, March.
  9. Kim, Suk-Joong & Sheen, Jeffrey, 2006. "Interventions in the Yen-dollar spot market: A story of price, volatility and volume," Journal of Banking & Finance, Elsevier, Elsevier, vol. 30(11), pages 3191-3214, November.
  10. Chang, Yuanchen & Taylor, Stephen J., 1998. "Intraday effects of foreign exchange intervention by the Bank of Japan1," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(1), pages 191-210, February.
  11. Michel Beine, 2004. "Conditional covariance and direct Central Bank intervention in the foreign exchange markets," ULB Institutional Repository, ULB -- Universite Libre de Bruxelles 2013/10431, ULB -- Universite Libre de Bruxelles.
  12. Michael Frenkel & Christian Pierdzioch & Georg Stadtmann, 2003. "The Effects of Japanese Foreign Exchange Market Interventions on the Yen/U.S. Dollar Exchange Rate Volatility," Kiel Working Papers, Kiel Institute for the World Economy 1165, Kiel Institute for the World Economy.
  13. Beine, Michel & Bernal, Oscar, 2007. "Why do central banks intervene secretly?: Preliminary evidence from the BoJ," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 17(3), pages 291-306, July.
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Cited by:
  1. Dewachter, Hans & Erdemlioglu, Deniz & Gnabo, Jean-Yves & Lecourt, Christelle, 2014. "The intra-day impact of communication on euro-dollar volatility and jumps," Journal of International Money and Finance, Elsevier, Elsevier, vol. 43(C), pages 131-154.
  2. Fatum, Rasmus & Yamamoto, Yohei, 2014. "Large versus small foreign exchange interventions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 43(C), pages 114-123.

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