Effectiveness of Official Daily Foreign Exchange Market Intervention Operations in Japan

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 2 3 IntroductionThe effectiveness of sterilized foreign exchange intervention has been the focus of an ongoing and unresolved controversy since the Jurgensen report was published by G-10 central banks almost twenty years ago (Jurgensen, 1983)). In theory, sterilized intervention may be effective, working through portfolio balance, signaling and noise trading channels. However, empirical support for the effectiveness of intervention, usually based on Bundesbank and Fed intervention, is mixed (see Dominguez and Frankel, 1993, andSarno andTaylor, 2001, for a recent survey of the literature). Nonetheless, policy makers-judging from their actions--view sterilized intervention as an instrument for policy. Reviewing the empirical evidence, Obstfeld and Rogoff (1996) conclude: "In any event, governments plainly believe that sterilized intervention has its uses, for they continue to practice it despite the lack of any hard evidence that it is consistently and predictably effective" (p. 595).Empirical studies to date, however, have not analyzed Japanese official intervention data since the Ministry of Finance (MoF) did not make this publicly available until July 2001. TheMoF now discloses, with a 1-3 month delay, the day of intervention, the amount of yen intervention (bought and sold by its agent, the Bank ...

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“…Turning the focus to long-term effects, she found evidence that the JPY/USD exchange rate moved in the appropriate direction within three months of the last intervention operation of the episode (or longer) for all five sub-samples. Fatum and Hutchison (2006) note that intervention in the JPY/USD exchange rate tended to come in clusters interspaced by prolonged periods of no intervention, and suggested an event study as a particularly fitting methodology for analyzing the BOJ intervention data. Defining an event as a period of days with official intervention in the JPY/USD exchange rate in one direction systematically affected the exchange rate in the short-run.…”