The Effectiveness of Foreign Exchange Market Intervention: A Review of Post-2001 Studies on Japan (original) (raw)
Related papers
Effectiveness of official daily foreign exchange market intervention operations in Japan
Journal of International Money and Finance, 2006
This paper investigates the effectiveness of intervention in the JPY/USD exchange rate market using recently published official daily data on Bank of Japan intervention and an event study methodology. 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.
International Review of Economics & Finance, 2005
Previous studies have mainly used reports in the financial press to analyze the link between the interventions of the Bank of Japan (BoJ) and exchange rate volatility. We use official intervention data for the period 1993-2000 that were released only recently by the BoJ and find that the interventions of the BoJ increased the volatility of the yen/U.S. dollar exchange rate. We find that that the interventions of the BoJ, in particular those interventions not reported in the financial press, were positively correlated with exchange rate volatility.
Journal of Empirical Finance, 2008
The purpose of this paper is to analyze the impact of the Bank of Japan's official interventions on the JPY/USD parity during the period 1992-2003. The novelty of our approach is to combine two recent advances of the empirical literature on foreign exchange interventions: (i) drawing on overthe-counter option prices to characterize more precisely the distribution of market expectations; (ii) redefining interventions in terms of events as they tend to come in clusters. Moreover, in order to deal with the features of the data (small sample size, non-standard distribution), we use bootstrap tests. We show that interventions have a significant impact on the mean expectation (the forward rate). The results are more ambiguous for variance. Additionally, we find that the effect of interventions on skewness is significant, robust to different definitions of skewness, and consistent with the direction of interventions. On the contrary, our results clearly show that kurtosis is not affected by interventions. We finally show that: (i) coordination increases effectiveness of interventions; (ii) results are not altered when controlling for other economic and political news.
Social Science Research Network, 2005
The purpose of this paper is to analyze the impact of the Bank of Japan's official interventions on the JPY/USD parity during the period 1992-2003. The novelty of our approach is to combine two recent advances of the empirical literature on foreign exchange interventions: (i) drawing on overthe-counter option prices to characterize more precisely the distribution of market expectations; (ii) redefining interventions in terms of events as they tend to come in clusters. Moreover, in order to deal with the features of the data (small sample size, non-standard distribution), we use bootstrap tests. We show that interventions have a significant impact on the mean expectation (the forward rate). The results are more ambiguous for variance. Additionally, we find that the effect of interventions on skewness is significant, robust to different definitions of skewness, and consistent with the direction of interventions. On the contrary, our results clearly show that kurtosis is not affected by interventions. We finally show that: (i) coordination increases effectiveness of interventions; (ii) results are not altered when controlling for other economic and political news.
Secrecy of Bank of Japan’s Yen intervention: Evidence of efficacy from intra-daily data
Journal of the Japanese and International Economies, 2010
Bank of Japan's Yen intervention: Evidence of efficacy from intra-daily data This paper examines the intraday effectiveness of the Bank of Japan (BOJ)'s foreign exchange interventions over the period May 13, 1991-March 16, 2004. The existing literature has generally failed to provide a comprehensive study on the effects of the BOJ's interventions, and particularly, the efficacy of public and secret operations. By dividing a 24-h trading day into three horizons, we show that the intraday evidence on the effects of official interventions documented in prior studies primarily came from publicly known interventions. In the case of secret interventions, although there were no clear impacts on the first moment of exchange rate returns, we found significant second moment responses. Specifically, covert operations were able to reduce the Yen/USD return volatility during both Tokyo and subsequent overnight market hours. Furthermore, our extended model on secret interventions reveals that when the BOJ completely concealed its transactions, undetected interventions were shown to be most effective in both reversing undesired trends and reducing excess return volatilities. On the other hand, those interventions that were rumoured were not as effective. Finally, the interventions conducted during the periods of 'oral interventions' were in general more effective in moving the exchange rate in the desired direction. J. Japanese Int. Economies 24 (3) (2010) 369-394.
Review of Financial Economics, 2004
During the past 30 years, central banks have often intervened in foreign exchange markets, and the magnitude of their foreign exchange market interventions has varied widely. We develop a quantitative reaction function model that renders it possible to examine the determinants of ''small'' and ''large'' interventions. We apply the model to analyzing the intervention policy of the Japanese monetary authorities (JMA) in the yen/U.S. dollar market during the period from 1991 through 2001. To this end, we use recently released official data on the foreign exchange market interventions of the JMA. We find that the JMA tended to conduct large interventions when the yen/U.S. dollar exchange rate drifted away from an ''implicit target exchange rate.''
Foreign-exchange intervention strategies and market expectations: insights from Japan
Journal of International Financial Markets, Institutions and Money, 2009
This study extends the traditional set of central bank's interventions to include official announcements in order to provide empirical evidence on two pivotal questions: (i) are FX authorities able to influence market expectations with different instruments? (ii) how should interventions be designed to have the greatest impact? Using Japanese data over 1992-2004 and an event-study approach, we estimate the effect of different strategies on the USD/JPY exchange-rate risk-neutral density. Overall, transparent policies (public and oral interventions) appear to be the most effective. Moreover, the effect is greater when policies involve a financial cost (risk) suggesting that simple announcements can only be deemed as an imperfect substitute for actual interventions.
Size matters: Central bank interventions on the yen/dollar exchange rate
2006
This paper explores the effects of the recent interventions of the Bank of Japan on the level and volatility of the yen/dollar exchange rate. A special attention is devoted to the prominent features affecting the signal conveyed by these interventions. The results show a clear duality: small unilateral interventions are counterproductive while large and isolated ones influence the FX market in the desired directions. It is also found that the perverse effect is avoided through coordinated operations.
Foreign exchange market intervention and expectations: The yen/dollar exchange rate
Journal of International Money and Finance, 2005
We use official intervention data provided by the Federal Reserve and, recently, the Japanese Ministry of Finance, as well as a new data set based on Reuters news articles on intervention that is perceived by FX traders. We estimate probability density functions (PDFs) from option data to describe market expectations. We find that, between 1993 and 1996, Japanese authorities tended to respond mainly to deviations of the exchange rate from some implicit target levels and to a rise in market uncertainty. Between 1997 and 2000, the Bank of Japan mainly reacted in response to higher uncertainty. On the other hand, the Federal Reserve intervened only in cooperation with the Bank of Japan. We find that intervention had no statistically significant systematic effect on the mean of yen/dollar expectations. Consistently, we detect no evidence that intervention systematically altered market participants' bias between a stronger and a weaker dollar with respect to the forward rate. Contrary to most findings of the literature, we fail to find evidence that intervention was associated on average with higher exchange rate variability. Finally, we find that intervention was not followed by an increase in the tails of the distribution of exchange rate expectations. The consensus view is that sterilized intervention can be effective if it is announced publicly, coordinated across central banks, and most importantly, consistent with underlying fiscal and monetary policies. As we are able to control for public announcement and central bank coordination, our findings suggest that intervention during our sample period was not consistent with underlying fiscal and monetary policy and therefore had little influence on market outcomes and expectations.
Bank of Japan Interventions and the Volatility of the Dollar/Yen Exchange Rate
Credit and capital markets, 2017
We analyse the impact of Bank of Japan's (BoJ) intervention on the volatility of the USD / JPY exchange rates under a regime switching framework. We find that the Yen intervention decreases the volatility, and the impact is only significant when market volatility is low. Die Interventionen der japanischen Zentralbank und die Volatilität des Dollar / Yen-Wechselkurses Zusammenfassung Der Beitrag analysiert den Effekt von Interventionen der japanischen Notenbank (BoJ) auf die Volatilität des USD / JPY-Wechselkurses im Rahmen eines Regime-Switching Modells. Die Ergebnisse zeigen, dass Interventionen die Volatilität senken. Allerdings ist der Effekt nur dann signifikant, wenn die Marktvolatilität niedrig ist.