In response to volatile market conditions, the G-7 financial authorities announced late on March 17 that they would jointly intervene the next day to reduce the value of the yen, citing concerns about “excess volatility and disorderly movements.” The yen immediately depreciated and traded with much less volatility in the subsequent week.Foreign exchange ; Yen, Japanese

Christopher J. Neely

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2011 ■ Number 23
A
9.0-magnitude earthquake rocked Japan on March
11, 2011, and caused a tsunami that killed more
than 15,000 people. The property damage totaled
hundreds of billions of dollars.1 The Japanese yen (JPY)
appreciated rapidly in the days following the earthquake:
From March 10 to March 17 the value of the yen rose by
about 5 percent against the U.S. dollar (USD). In addition,
foreign currency markets became extremely volatile. The
financial press cited expectations that Japanese investors,
including insurance companies, would need to repatriate
assets—for example, stocks and bonds—held abroad to pay
for earthquake damages as the reason for the yen’s increased
value. 
In response to these volatile market conditions, the 
G-7 financial authorities—the finance ministers of Japan,
Canada, the United States, the United Kingdom, and the
president of the European Central Bank—announced late
on Thursday, March 17, that they would
jointly intervene the next day to reduce
the value of the yen. The G-7 authorities
cited concerns about “excess volatility and
disorderly movements” in their press
release. As the chart shows, the yen imme-
diately depreciated by about 3 percent
and was much less volatile in the subse-
quent week.
This foreign exchange intervention was
very unusual. Since 1995, most govern-
ments and central banks of economically
advanced countries have avoided using
intervention as a policy tool. Still, they
retain it in their toolkits and have
employed it successfully to move the
exchange rate in the desired direction
and reliquefy markets on several unusual
occasions. 
Why is exchange rate policy, including
intervention, important? Foreign exchange
markets are large and interconnected with
stock and bond markets. Disorder, or
lack of both buyers and sellers in foreign
exchange markets, can affect other asset markets, and large
swings in exchange rates can affect the balance sheets of
banks and other financial firms. Further, exchange rates
are important prices for international trade in goods and
services. For example, a rise in the value of the yen could
The Great Foreign Exchange Intervention of 2011
Christopher J. Neely, Assistant Vice President and Economist
Realized Volatility
Exchange Rate Level
Intervention
Announcement
Annualized Volatility (percent) JPY/USD
50
40
30
20
10
82
81
80
79
78
77
03/13 03/14 03/15 03/16 03/17 03/18 03/19 03/20 03/21 03/22 03/23 03/24 03/25
JPY/USD Market Behavior Near the March 17, 2011, 
G-7 Intervention Announcement
NOTE: The chart shows daily annualized realized volatility (the square root of a backward-
looking 24-hour average of 5-minute squared returns) and the exchange rate for the JPY/USD 
market from March 13, 2011, to March 25, 2011.
In response to volatile market conditions,
the G-7 financial authorities announced
late on March 17 that they would jointly
intervene the next day to reduce the value
of the yen, citing concerns about “excess
volatility and disorderly movements.” 
The yen immediately depreciated and
traded with much less volatility in 
the subsequent week.harm Japanese tradable goods industries, and excessive
volatility could discourage international trade. Exchange
rates can even affect inflation by passing through to the
prices of imported goods.
The circumstances leading up to the March 18 G-7
intervention and its immediate results were similar to those
of coordinated interventions in June 1998 to support the
yen and in September 2000 to support the euro. In each
case, special circumstances—an earthquake, a recent finan-
cial crisis, or a new central bank and incipient recession—
made exchange rate misalignments more costly than usual,
and excessive volatility made financial markets disorderly.
Press reports of intervention discussions might have pro-
duced modest exchange rate movements prior to the actual
intervention (or announcement). Neverthe  less, exchange
rates reacted strongly and quickly to each intervention 
(or its announcement), moving about 4 percent in the
desired direction and volatility declined substantially. ■
Hosaka, Tomoko A. “Japan Disaster Likely to Be World’s Costliest.” Associated
Press, March 23, 2011; 
http://news.yahoo.com/s/ap/20110323/ap_on_bi_ge/as_japan_earthquake_economy.
National Police Agency of Japan. “Damage Situation and Police Countermeasures
Associated with the 2011 Tohoku District.” May 2011;
www.npa.go.jp/archive/keibi/biki/higaijokyo_e.pdf.
1 See Hosaka (2011) and National Police Agency of Japan (2011).
Economic SYNOPSES Federal Reserve Bank of St. Louis      2
research.stlouisfed.org
Posted on July 27, 2011
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

The great foreign exchange intervention of 2011

http://research.stlouisfed.org/publications/es/11/ES1123.pdf

The great foreign exchange intervention of 2011

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