Japanese foreign exchange intervention: A tale of pattern, size, or frequency

This paper contributes to the debate of the efficacy of different patterns of foreign exchange intervention (FXI). Daily data on the Japanese foreign exchange intervention and the Yen/Dollar exchange rates among other macroeconomic variables over the period 1992-2004, in an EGARCH time series model is used to measure the impact of intervention on both the level and volatility of the exchange rate. This paper offers two important results in regard to the effectiveness of the Japanese FXI. First, this study tests whether the pattern of FXI leads to conflicting outcomes with respect to the desired level and volatility of the exchange rates. Second, this study examines the asymmetric impact of the frequency and size of the Japanese FXI on the level and volatility of the exchange rate. This paper finds that successful depreciation of the yen has always been achieved at the expense of higher volatility, a result that supports the conflicting outcomes of the Japanese FXI. In addition, the frequency of intervention is found to be a crucial factor in affecting the level of the exchange rate while the size of intervention is more influential in affecting its volatility.

► I examine effectiveness of Japanese foreign exchange intervention in yen/dollar market. ► Pattern of intervention leads to conflicting outcomes on level and volatility of exchange rate. ► Size of intervention is more effective on volatility of exchange rate. ► Frequency of intervention is more effective on level of exchange rate. ► Small-sized frequent interventions reduce volatility and large-sized infrequent interventions increase volatility.