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Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is It Effective, and through Which Channel Does It Work?

  • Rasmus Fatum

    (School of Business, University of Alberta (E-mail:

This paper investigates whether official Japanese intervention in the JPY/USD exchange rate over the January 1999 to March 2004 time period is effective. By integrating the official intervention data with a comprehensive set of newswire reports capturing days on which there is a rumor or speculation of intervention, the paper also attempts to shed some light on which of the two channels, the signaling channel in a broad sense or the portfolio balance channel, effective Japanese intervention works through. The results suggest that Japanese intervention is effective during the first five years of the sample and ineffective during the last three months of the sample, thereby providing an ex post rationale for why Japan intervened as well as for why the interventions stopped. Moreover, the results suggest that when Japanese intervention is effective, it works through a portfolio balance channel. The results do not rule out that effective intervention also works through signaling.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 27 (2009)
Issue (Month): 1 (November)
Pages: 75-98

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Handle: RePEc:ime:imemes:v:27:y:2009:i:1:p:75-98
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  1. Fatum, Rasmus & Scholnick, Barry, 2006. "Do Exchange Rates Respond to Day-to-Day Changes in Monetary Policy Expectations When No Monetary Policy Changes Occur?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1641-1657, September.
  2. Engel, Charles & West, Kenneth D., 2003. "Exchange rates and fundamentals," Working Paper Series 0248, European Central Bank.
  3. Reitz, Stefan & Taylor, Mark P., 2006. "The coordination channel of foreign exchange intervention: a nonlinear microstructural analysis," Discussion Paper Series 1: Economic Studies 2006,08, Deutsche Bundesbank, Research Centre.
  4. Rasmus Fatum & Michael M. Hutchison, 2003. "Is sterilised foreign exchange intervention effective after all? an event study approach," Economic Journal, Royal Economic Society, vol. 113(487), pages 390-411, 04.
  5. Fratzscher, Marcel, 2004. "Communication and exchange rate policy," Working Paper Series 0363, European Central Bank.
  6. Takatoshi Ito & Tomoyoshi Yabu, 2004. "What Prompts Japan to Intervene in the Forex Market? A New Approach to a Reaction Function," NBER Working Papers 10456, National Bureau of Economic Research, Inc.
  7. Fatum, Rasmus & Pedersen, Jesper, 2009. "Real-time effects of central bank intervention in the euro market," Journal of International Economics, Elsevier, vol. 78(1), pages 11-20, June.
  8. Humpage, Owen F, 1999. "U.S. Intervention: Assessing the Probability of Success," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 731-47, November.
  9. Kathryn M.E. Dominguez & Freyan Panthaki, 2007. "The Influence of Actual and Unrequited Interventions," NBER Working Papers 12953, National Bureau of Economic Research, Inc.
  10. Andreas M. Fischer, 2005. "On the Inadequacy of Newswire Reports for Empirical Research on Foreign Exchange Interventions," Working Papers 2005-02, Swiss National Bank.
  11. 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.
  12. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Working Papers 2005-030, Federal Reserve Bank of St. Louis.
  13. 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.
  14. Rasmus Fatum & Michael Hutchison, 2002. "ECB Foreign Exchange Intervention and the EURO: Institutional Framework, News, and Intervention," Open Economies Review, Springer, vol. 13(4), pages 413-425, October.
  15. Fatum, Rasmus & Hutchison, Michael, 1999. "Is Intervention a Signal of Future Monetary Policy? Evidece from the Federal Funds Futures Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 54-69, February.
  16. Rasmus Fatum & Michael M. Hutchison, 2004. "Foreign Exchange Intervention and Monetary Policy in Japan, 2003-04," EPRU Working Paper Series 05-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Jan 2005.
  17. Beine, Michel & Janssen, Gust & Lecourt, Christelle, 2009. "Should central bankers talk to the foreign exchange markets?," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 776-803, September.
  18. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  19. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  20. Lewis, Karen K, 1995. "Are Foreign Exchange Intervention and Monetary Policy Related, and Does It Really Matter?," The Journal of Business, University of Chicago Press, vol. 68(2), pages 185-214, April.
  21. William P. Osterberg & Rebecca Wetmore Humes, 1993. "The inaccuracy of newspaper reports of U.S. foreign exchange intervention," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 25-33.
  22. Takatoshi Ito, 2007. "Myths and reality of foreign exchange interventions: an application to Japan," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 133-154.
  23. Naranjo, Andy & Nimalendran, M, 2000. "Government Intervention and Adverse Selection Costs in Foreign Exchange Markets," Review of Financial Studies, Society for Financial Studies, vol. 13(2), pages 453-77.
  24. Chang, Yuanchen, 2006. "The accuracy of reports of foreign exchange intervention by the Bank of Japan: Does Tokyo know more?," Journal of International Money and Finance, Elsevier, vol. 25(8), pages 1241-1256, December.
  25. Jansen, David-Jan & De Haan, Jakob, 2005. "Talking heads: the effects of ECB statements on the euro-dollar exchange rate," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 343-361, March.
  26. Gabriele Galati & Patrick C. Higgins & Owen F. Humpage & William R. Melick, 2006. "Option prices, exchange market intervention, and the higher moment expectations channel: a user’s guide," Working Paper 0618, Federal Reserve Bank of Cleveland.
  27. 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,.
  28. Baillie, Richard T & Bollerslev, Tim, 2002. "The Message in Daily Exchange Rates: A Conditional-Variance Tale," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 60-68, January.
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