Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan
Journal of International Money and Finance, Vol. 25, No. 2, 2006
UC Santa Cruz International Economics Working Paper No. 03-22
University of Alberta School of Business Research Paper No. 2013-355
35 Pages Posted: 4 Jul 2004 Last revised: 7 Jun 2013
There are 2 versions of this paper
Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan
Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan
Date Written: November 1, 2003
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.
JEL Classification: F31, F33, F42, G15
Suggested Citation: Suggested Citation
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