Recent Experience of the Effects of Intervention on Exchange Rates

Abstract

Recently, foreign exchange rates have been highly volatile all over the world. This article reports on an empirical examination of the effectiveness of foreign exchange market intervention in Tokyo foreign exchange market. In Japan, intervention in the foreign exchange market has occurred frequently and largely. In 2010, exchange rates fluctuated greatly, and the Japanese yen appreciated greatly against other foreign currencies. The Bank of Japan (BOJ) conducted an intervention in the foreign exchange market and bought massive USD to weaken the yen. They are expected to prevent too much appreciation of the yen, to promote export, and expansion of the economy. Recent foreign exchange market intervention in Tokyo has been effective in preventing the Japanese yen from appreciating against other currencies. Also, unsterilization has had a positive effect on depreciation of the yen. Moreover, news announcements by the Bank of Japan (BOJ) has led to depreciation of the yen. Effective announcements would increase the effects on markets. Sterilization in intervention and market communication are both taken into account in this article. The BOJ's news announcements seem to convey to markets adequately and communication between the bank and markets functions well. Moreover, the past exchange rate (i.e., the signaling effect) also is important to the movement of exchange rates. On the other hand, portfolio channel is not found.