Currency intervention and the global portfolio balance effect: Japanese lessons

• Official Japanese dollar purchases in 2003–04 lowered global bond yields.
• Weekly Fed custody data connect Japanese intervention to US bond purchases.
• Our results support a portfolio balance effect in a globally integrated bond market.
• Our results resemble those of studies of Federal Reserve large-scale bond purchases.
• We focus clearly on portfolio shifts that do not signal monetary policy changes.

This paper extends the analysis of Bernanke et al. (2004) to show that the official Japanese purchases of foreign exchange in 2003–04 seem to have lowered long-term interest rates not only in the United States, but in a wide range of countries, including Japan. It seems that this decline was triggered by the investment of the intervention proceeds in US bonds and that global portfolio rebalancing spread the resulting decline in US dollar yields to bond markets in other currencies, thus easing global monetary conditions. We also show that the global portfolio balance effect is detectable in the response of yields to large Japanese intervention in data before and after 2003/04, though the effect is weaker. While our findings contribute to a growing body of work that points to common responses across bond markets to official portfolio shifts in the form of large-scale bond purchases (“quantitative easing”), our analysis has the advantage of focusing on a pure portfolio shock.