The great intervention and massive money injection: The Japanese experience 2003–2004

From the beginning of 2003 to the spring of 2004, Japan’s monetary authorities conducted large-scale yen-selling/dollar-buying operations in what Taylor (2006) has labeled the “Great Intervention.” This paper examines the relationship between this “Great Intervention” and the quantitative easing policy the Bank of Japan was pursuing at that time. First, we find that about 40 percent of the yen funds supplied to the market by yen-selling interventions were not offset by the BOJ’s monetary operations and remained in the market for a while; this is in contrast with the preceding period, when almost 100 percent were immediately offset. Second, comparing interventions and other government payments, the extent to which the funds were offset was much smaller in the case of interventions, suggesting that the BOJ differentiated between, and responded differently to, interventions and other government payments. These two findings indicate that it is likely that the BOJ intentionally did not sterilize yen-selling interventions to achieve its policy target of maintaining the current account balances of commercial banks at the BOJ at a high level. Finally, we find that an unsterilized intervention had a greater impact on the yen–dollar rate than a sterilized one, suggesting that it matters whether an intervention is sterilized or not even when the economy is in a liquidity trap.