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

Abstract

(2006) has labeled the "Great Intervention." The purpose of the present paper is to empirically examine the relationship between this "Great Intervention" and the quantitative easing policy the Bank of Japan (BOJ) was pursuing at that time. Using daily data of the amount of foreign exchange interventions and current account balances at the BOJ, our analysis arrives at the following conclusions. First, while about 60 percent of the yen funds supplied to the market by yen-selling interventions were immediately offset by the BOJ's monetary operations, the remaining 40 percent were not offset and remained in the market for some time; this is in contrast with the preceding period, when almost 100 percent were offset. Second, comparing foreign exchange interventions and other government payments, the extent to which the funds were offset by the BOJ were much smaller in the case of foreign exchange interventions, and the funds also remained in the market longer. This finding suggests that the BOJ differentiated between and responded differently to foreign exchange interventions and other government payments. Third, the majority of financing bills issued to cover intervention funds were purchased by the BOJ from the market immediately after they were issued. For that reason, no substantial decrease in current account balances linked with the issuance of FBs could be observed. These three findings indicate that it is highly likely that the BOJ, in order to implement its policy target of maintaining current account balances at a high level, intentionally did not sterilize yen-selling/dollar-buying interventions. JEL Classification Numbers: F30; E52; E58

Foreign Exchange Intervention and Monetary Policy: A Tale of Two Agencies with Conflicting Objectives

“…If we were to estimate the typical central bank reaction function of the literature, by regressing Δ over f (rather than γ ), we would obtain 0.463 as an estimate of the coefficient of f , with a standard error of 0.180. This point estimate is remarkably similar in magnitude to the estimates of 0.30–0.59 reported by Fatum and Hutchison () and 0.389–0.460 reported by Watanabe and Yabu (), both in the context of Japan's great intervention.…”

A New Method for Identifying the Effects of Foreign Exchange Interventions

“…We deliberately exclude this period, because, as shown by previous studies, the motivation for interventions was quite different from that in preceding periods. See Taylor (2006), Ito (2007), and Watanabe and Yabu (Forthcoming) for more on the intervention policy during this period.…”

The effectiveness of quantitative easing: Evidence from Japan

“…Japanese short-term interest rates close to zero-lower bound and weak economic activity plagued by significant deflation risks led Bank of Japan (BoJ) to adopt the first round of an unconventional monetary policy strategy known as quantitative easing (QE). The first QE program by BoJ constitutes an increase in the commercial bank current account balance (CAB) from ¥5 trillion to ¥35 trillion over a four-year period, known as a QE 1 program, starting in March 2001 and ending in 2005 (Watanabe, & Yabu, 2013).…”