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Is Foreign Exchange Intervention Effective?: The Japanese Experiences in the 1990s

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  • Takatoshi Ito

Abstract

This paper examines Japanese foreign exchanges interventions from April 1991 to March 2001 based on newly disclosed official data. All the yen-selling (dollar-purchasing) interventions were carried out when the yen/dollar rate was below 125, while all the yen-purchasing (dollar-selling) interventions were carried out when the yen/dollar was above 125. The Japanese monetary authorities, by buying the dollar low and selling it high, have produced large profits, in terms of realized capital gains, unrealized capital gains, and carrying (interest rate differential) profits, from interventions during the ten years. Profits amounted to 9 trillion yen (2% of GDP) in 10 years. Interventions are found to be effective in the second half of the 1990s, when daily yen/dollar exchange rate changes were regressed on various factors including interventions. The US interventions in the 1990s were always accompanied by the Japanese interventions. The joint interventions were found to be 20-50 times more effective than the Japanese unilateral interventions. Japanese interventions were found to be prompted by rapid changes in the yen/dollar rate and the deviation from the long-run mean (say, 125 yen). The interventions in the second half were less predictable than the first half.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8914.

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Date of creation: Apr 2002
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Publication status: published as Mizen, Paul (ed.) Monetary History, Exchange Rates and Financial Markets, Essays in Honour of Charles Goodhart, Volume 2. Cheltenham U.K. : Edward Elgar Pub, 2003.
Handle: RePEc:nbr:nberwo:8914

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  1. Edison, H.J., 1993. "The Effectiveness of Central-Bank Intervention: A Survey of the Litterature after 1982," Princeton Studies in International Economics 18, International Economics Section, Departement of Economics Princeton University,.
  2. Kathryn M. Dominguez, 1989. "Market Responses To Coordinated Central Bank Intervention," NBER Working Papers 3192, National Bureau of Economic Research, Inc.
  3. Owen F. Humpage, 1988. "Intervention and the dollar's decline," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-16.
  4. Ramana Ramaswamy & Hossein Samiei, 2000. "The Yen-Dollar Rate," IMF Working Papers 00/95, International Monetary Fund.
  5. 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 2690, C.E.P.R. Discussion Papers.
  6. Kathryn Dominguez & Jeffrey A. Frankel, 1990. "Does Foreign Exchange Intervention Work?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 16.
  7. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-69, December.
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