Official Japanese Intervention in the JPY/USD Exchange Rate Market:
Is It Effective, and through Which Channel Does It Work?

Rasmus Fatum

This paper investigates whether official Japanese intervention in the JPY/USD exchange rate over the January 1999 to March 2004 time period is effective. By integrating the official intervention data with a comprehensive set of newswire reports capturing days on which there is a rumor or speculation of intervention, the paper also attempts to shed some light on which of the two channels, the signaling channel in a broad sense or the portfolio balance channel, effective Japanese intervention works through. The results suggest that Japanese intervention is effective during the first five years of the sample and ineffective during the last three months of the sample, thereby providing an ex post rationale for why Japan intervened as well as for why the interventions stopped. Moreover, the results suggest that when Japanese intervention is effective, it works through a portfolio balance channel. The results do not rule out that effective intervention also works through signaling.

Key words: Exchange rates; Foreign exchange market intervention; Channels of transmission