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Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan

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  • Fatum, Rasmus
  • Hutchison, Michael M.

Abstract

Japanese official intervention in the foreign exchange market is of by far the largest magnitude in the world, despite little or no evidence that it is effective in moving exchange rates. Up until recently, however, official data on intervention has not been available for Japan. This paper investigates the effectiveness of intervention using recently published official daily data and an event study methodology. The event study better fits the stochastic properties of intervention and exchange rate data, i.e. intense and sporadic bursts of intervention activity juxtaposed against a yen/dollar rate continuously changing, than standard time-series approaches. Focusing on daily Japanese and US official intervention operations, we identify separate intervention “episodes†and analyze the subsequent effect on the exchange rate. Using the non-parametric sign test and matched-sample test, we find strong evidence that sterilized intervention systemically affects the exchange rate in the short-run (less than one month). This result holds even when intervention is not associated with (simultaneous) interest rate changes, whether or not intervention is “secret†(in the sense of no official reports or rumors of intervention reported over the newswires), and against other robustness checks. Large-scale (amounts over $1 billion) intervention, coordinated with the Bank of Japan and the Federal Reserve working in unison, give the highest success rate. During the period that the Bank of Japan has reduced interbank rates to 0.5 percent and below (from September 1995), however, only one intervention operation has been coordinated with the Fed and the success rate has been correspondingly low.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt2883n7z5.

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Date of creation: 24 Nov 2003
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Handle: RePEc:cdl:ucscec:qt2883n7z5

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  1. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 39(3), pages 839-868, September.
  2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, Econometric Society, vol. 48(4), pages 817-38, May.
  3. Takatoshi Ito, 2002. "Is Foreign Exchange Intervention Effective?: The Japanese Experiences in the 1990s," NBER Working Papers, National Bureau of Economic Research, Inc 8914, National Bureau of Economic Research, Inc.
  4. William Melick & Gabriele Galati, 1999. "Perceived central bank intervention and market expectations: an empirical study of the yen/dollar exchange rate, 1993 - 96," BIS Working Papers, Bank for International Settlements 77, Bank for International Settlements.
  5. Svensson, Lars, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Seminar Papers, Stockholm University, Institute for International Economic Studies 687, Stockholm University, Institute for International Economic Studies.
  6. Glick, Reuven & Hutchison, Michael M., 2000. "Foreign reserve and money dynamics with asset portfolio adjustment: international evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 10(3-4), pages 229-247, December.
  7. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(487), pages 390-411, 04.
  8. Reuven Glick & Michael Hutchison, 1993. "Monetary policy, intervention, and exchange rates in Japan," Pacific Basin Working Paper Series, Federal Reserve Bank of San Francisco 93-07, Federal Reserve Bank of San Francisco.
  9. Campbell, Cynthia J. & Wesley, Charles E., 1993. "Measuring security price performance using daily NASDAQ returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 73-92, February.
  10. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, American Economic Association, vol. 83(5), pages 1356-69, December.
  11. Takatoshi Ito & V. Vance Roley, 1986. "News from the U.S. and Japan: which moves the yen/dollar exchange rate?," Research Working Paper, Federal Reserve Bank of Kansas City 86-02, Federal Reserve Bank of Kansas City.
  12. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 35(1), pages 13-39, March.
  13. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  14. Rasmus Fatum, 2002. "Post-Plaza intervention in the DEM/USD exchange rate," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 35(3), pages 556-567, August.
  15. Ramana Ramaswamy & Hossein Samiei, 2000. "The Yen-Dollar Rate," IMF Working Papers, International Monetary Fund 00/95, International Monetary Fund.
  16. Kathryn Dominguez & Jeffrey A. Frankel, 1990. "Does Foreign Exchange Intervention Work?," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 16, July.
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