From 1999 to 2004 Japan unilaterally sold a combined, and unprecedented, 500 billion dollars of yen.Foreign exchange market ; Japan

Brett Fawley

Luciana Juvenal

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2010 ■ Number 32
O
n September 15, the Bank of Japan (BOJ)
responded to a 15-year high in the yen’s value
against the dollar by selling an estimated 1.76 to
1.86 trillion yen in the foreign exchange (FX) market. The
chart captures the telltale trade volume of an FX interven-
tion (buying and/or selling of assets by a monetary author-
ity to influence exchange rates) and the immediate effect:
a 3 percent overnight depreciation of the yen against the
dollar. To achieve a prolonged impact, however, Japan will
need to demonstrate a strong commitment to continued
intervention. 
Since the summer of 2007, the yen has gained more
than 30 percent against the dollar. Analysts attribute
the yen’s newfound strength to increased investment
demand and, more specifically, a diminished global
appetite for risk. During times of high volatility
and uncertainty, investors trade higher returns for
increased confidence in their investments. Japan’s
current account surplus and deflationary price trend
increase the yen’s perception as a “safe haven” cur-
rency (i.e., a currency with low risk of rapid depre-
ciation). Abnormally low interest rates in the United
States and Europe only further encourage demand
for the yen, a currency with traditionally low interest
rates and thus a low return on investment.1
Japanese FX intervention is not without prece-
dent. From 1999 to 2004 Japan unilaterally sold a
combined, and unprecedented, 500 billion dollars
of yen in the FX market. Recent research estimates
that without these interventions, the yen’s value
would have been 30 percent higher in March 2004,
the date of Japan’s last intervention (Fatum, 2010).
Both in the past and the present, Japanese monetary
authorities turned to intervention when they viewed
their economy as fragile (Ito, 2005). A lower-valued
yen aids economic recovery by making Japanese
goods cheaper internationally, thus stimulating
exports.
If Japan is successful, it will rely heavily on the signaling
channel, one of two main channels economists believe FX
intervention works through. The other, the portfolio balance
channel, presumes that (i) investors hold investments of
varying degrees of substitutability and (ii) intervention
affects asset prices by manipulating their supply. Fatum
(2010) finds strong evidence of this channel operating in
Japan Reenters the Foreign Exchange Market
Brett Fawley, Research Associate
Luciana Juvenal, Economist
0
20
40
60
$ Billions
Exchange  Rate  Movement  Around  September 15 
BOJ  Intervention
08/06 08/14 08/22 08/30 09/07 09/15 09/23 10/01
82
84
86
88
JPY/USD
Turnover
Exchange Rate
NOTE: Turnover data are from the Bank for International Settlements and include 
all trades handled through brokerage companies in the Tokyo exchange market, 
where the BOJ primarily operates (www.boj.or.jp/en/type/exp/faqkainy.htm). 
The foreign exchange rate is from Haver Analytics. Dates are for 2010. 
JPY, Japanese yen; USD, U.S. dollars.
From 1999 to 2004 Japan unilaterally
sold a combined, and unprecedented,
500 billion dollars of yen.the immediate impact of past BOJ interventions, but the
yen’s retracement of its gains since September is linked to
growing expectations of further U.S. quantitative easing,
also reflecting portfolio balance effects (Neely, 2010). Con  -
versely, the signaling channel informs the market of the
direction of future policy actions. The cautious movement
observed in the yen following intervention indicates that
investors are accounting for the positive probability of future
intervention. Without the full credibility of a coordinated
multilateral intervention strategy, however, the yen has
already risen to a new 15-year high. Only more interven-
tion will convince markets of Japan’s commitment. ■
Fatum, Rasmus. “Foreign Exchange Intervention When Interest Rates Are Zero:
Does the Portfolio Balance Channel Matter After All?” Working Paper No. 57,
Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute, July
2010; www.dallasfed.org/institute/wpapers/2010/0057.pdf.
Ito, Takatoshi. “Is Foreign Exchange Intervention Effective? The Japanese
Experience in the 1990s,” in Paul Mizen, ed., Monetary History, Exchange Rates
and Financial Markets, Essays in Honour of Charles Goodhart. Volume 2.
Cheltenham, UK, Edward Elgar, 2003.
Neely, Christopher. “The Large Scale Asset Purchases Had Large International
Effects.” Working Paper No. 2010-018A, Federal Reserve Bank of St Louis, July
2010; http://research.stlouisfed.org/wp/2010/2010-018.pdf. 
1 Additionally, China is speculated to be diversifying its large foreign reserve
holdings away from the U.S. dollar and toward the yen.
Economic SYNOPSES Federal Reserve Bank of St. Louis      2
research.stlouisfed.org
Posted on November 4, 2010
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

Japan reenters the foreign exchange market

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Japan reenters the foreign exchange market

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