〔研究ノート〕

Intervention in the Foreign Exchange Market andExchange Rates in Japan

Yutaka Kurihara

Abstract
This paper employed the GARCH model to examine the effect on exchange
rate of the Bank of Japan’ s (BOJ’ s) daily foreign exchange market
intervention in Japan. BOJ’s foreign exchange market interventions influence
the exchange rate level. These interventions are effective in changing thelevel of exchange. The purchase (or sale) of the US dollar results indepreciation (or appreciation) of the Japanese yen. Also, there is no evidenceof statistically significant day-of-the-week effects.

１．Introduction
Foreign exchange market intervention by central banks have a strong
influence on exchange rate movements. The purpose of foreign exchange
market interventions is to moderate exchange rate misalignment or to avoid
exchange rate volatility from excess movements in the foreign exchange― 85 ―

market. An accumulation of foreign exchange reserves and showing futuremonetary policy to various stakeholders are also their taken measures.
Excess exchange rate movements have negative effects on financial capital
flows, international trade, investment, output, and so on. It is likely that higherexchange rate volatility increases risks by increasing uncertainty about future
earnings and should be avoided.
Because of recent higher economic risks that stem from exchange rate
volatility, attention has shifted to an examination of the effects of central bankinterventions on exchange rate volatility.

1

Central bank intervention inforeign exchange markets is considered effective only if it helps to containexchange rate volatility.
This paper examines effectiveness of foreign exchange market interventions.
Many papers have been published about intervention. Among these, this study
examines day-of-the-week effects in the Tokyo market. The paper is structured
as follows: Section 2 provides a theoretical view to support the empirical analysis.
Section 3 gives empirical results and analysis based on the previous section’s
method. Finally, this paper ends with a brief summary.

２．Empirical Method
This paper employs the empirical GARCH (generalized autoregressive
conditional heteroskedasticity) model to examine the effect of BOJ’ sinterventions on exchange rate. GARCH is designed to model and forecast
conditional variances. The variance of the dependent variable is modeled as afunction of past values of the dependent variable and independent orexogenous variables.
To control other activity of the central bank that could affect exchange― 86 ―

Intervention in the Foreign Exchange Market and Exchange Rates in Japanrate, short-term interest rate (INTEREST; money market overnight rate),
foreign reserves to import (RESERVE), and the expectation of exchange rate(EXPECT) are included in the equation. Foreign reserves to import means
the capacity for intervention.
5Exchanget ＝ a 0＋6 a 1Dit ＋ a 6Interventiont ＋ bV(Z)i＝1

where Exchange is percent log difference of Japanese yen/US dollar exchange
rate; D1 t, D2 t, D3 t, D4 t, and D5 t are day-of-the-week dummy variables for
Monday, Tuesday, Wednesday, Thursday, and Friday, respectively with
Saturday as a reference point.

2Intervention is BOJ’ s intervention in theforeign exchange market (a positive value means net purchase of foreign
currency in US dollars). V(Z) is the vector of other relevant explanatory
variables.

３．Empirical Results
Before estimating the GARCH model, it is necessary to understand theimpact of the BOJ’s intervention on exchange rate volatility. The results ofGranger’ s causality test show unidirectional causality between BOJ’ sintervention (Intervention) and unconditional exchange rate volatility(Volatility) . Volatility is measured by the squared log difference of theexchange rate.
After getting information on the direction of causality, time series
properties of the data are examined. Except for log of the exchange rate, all of
the data are stationary according to the augmented Dickey-Fuller (ADF) test.
The log of the exchange rate is integrated at order one and thus becomes― 87 ―

stationary.
The table below shows the results of GARCH model.
Model A shows that all variables are not significant in the equation andreveals no evidence of statistically significant day-of-the-week effects. Thepurchase (sale) of the US dollar causes depreciation (appreciation) of theJapanese yen.
Model B includes relevant exogenous explanatory variables in theequation. They have a significant effect on this equation. The signs ofINTEREST and RESERVE are negative and significant. The increase(decrease) in the interest rate results in appreciation (depreciation) of theexchange rate. The higher foreign reserve is linked with appreciation of theexchange rate level and vice versa. The expectation of the exchange rate has
Table. Results of Intervention in the Japanese Foreign Exchange Market
Model A

Model B

Coefficientt valueConstant−0.00065−0.20

Monday0.01320.28

Tuesday0.0105

1.09

Wednesday

0.0231

1.10

Thursday

0.01580.62

Friday0.01300.45

Intervention

0.0005＊＊

3.21

Intervention(−1)

−3.08
−6.03

＊

−2.18

−2.0512
at 5%, and― 88 ―

＊

6.95

＊＊＊

＊＊＊

＊＊

t value＊＊−0.0009

EXPECT
denotes significant at 1%,＊＊＊0.0015

RESERVE

Note.

0.0009−0.0009

INTEREST＊＊＊Coefficient

at 10% respectively

5.03

Intervention in the Foreign Exchange Market and Exchange Rates in Japana significant impact on changes to the exchange rate.

４．Conclusion
This paper employed the GARCH model to examine the effect of BOJ’s
daily foreign exchange market in Japan on exchange rate. BOJ’ s foreignexchange market intervention influences the exchange rate level. This
intervention is effective in changing the level of exchange, but the contemporaneous
effect had a reverse sign.

3However, evidence is mixed as findings. Forexample, the findings of Fatum and Hutchison (2003) and Fatum andPederson (2009) supported this notion and Aguilar and Nydalh (2000) didnot.
The selected exchange rate, the sample period examined, and the empirical4

method or theoretical model employed could change the results.

Also,coordination channeled through foreign exchange market interventions may
be effective by catching up with the fundamentals. Moreover, some studies
have shown that central bank interventions tend to increase exchange rate
5volatility.

There may be some room for further research.

Notes
１．Some studies have focused on sterilized intervention in foreign exchange market. SeeKlein and Rosengren (1991) , Dominguez (1993) , and Laminsky and Lewis (1996) .
Taylor (1994) and Reiz and Taylor (2008) proposed that the coordination channel
through intervention may be effective. Bertoli et al. (2010) employed the exchange
market pressure (EMP) index developed by Eichengreen et al. (1994) and suggested
that the index is sensitive to some assumptions behind the information available,
especially when markets are involved. Kim and Le (2010) also suggested that the― 89 ―

interventions conducted during periods of oral intervention were in general more
effective in moving exchange rate in the desired direction.
２．Yamori and Kurihara (2006) examined day-of-the week anomalies in foreign exchange
markets.
３．Shah et al. (2009) showed the same results in the case of Pakistan. Breedon and Vitale(2010) suggested that the strong contemporaneous correlation between order flow andexchange rates is largely due to portfolio-balance effects. Marsh (2010) also indicatedthat strong contemporaneous correlation between order flows and exchange rate changes
essentially disappears on days when the bank of Japan intervenes.
４．On the other hand, there is no day-of-the-week effect. This shows that the market has
been efficient.
５．See Benie et al. (2007, 2009) , for example. However, other studies, for example,
Eijffinger and Gruijters (1991), Dominguey (1992), and Pasquariello (2010) have shownthat foreign exchange intervention reduces exchange rate volatility.

References
Aguilar, J., and Nydalh, S. (2000) “Central bank intervention and exchange rate: the case ofSweden,” Journal of International Financial Markets, Institutions and Money 10,303-322.
Bertoli, S., Giampiero, M., Ricchiuti, G. G. (2010) “Exchange market pressure: Some caveats
in empirical applications,” Applied Economics 42, 24-35.
Benie, M., Lahaye, J., Laurent, S., Neely, C. J. and Palm, F. C. (2007) “Central bankintervention and exchange rate volatility, its continuous and jump components,”
International Journal of Finance and Economics 12, 201-223.
Benie, M., Jassen, and Lecourt, C. (2009) “Should central bankers talk to the foreignexchange markets,” Journal of International Money and Finance 28, 776-790.
Breedon, F., Vitale, P. (2010) “An empirical study of portfolio-balance and information
effects of order flow on exchange rates,” Journal of International Money and Finance 29(3), 504-520.
Dominguez, K. M. (1992) Does central bank intervention increase volatility of foreignexchange rates? Harvard University, Cambridge, MA.
Dominguez, K. M. (1993) “Does foreign exchange intervention matter? The portfolio
effect,” American Economic Review 83, 1356-1369.
Eijffinger, S. C., and Gruijters, N. P. D. (1991) “On the short term objectives of dailyintervention by the Deuche Bundesbank and the federal reserve system in the USdollar/Deutsche mark exchange market,” Kredit and Kapital 24, 50-72.
Fatum, R. and Hutchison, M. M. (2003) “Effectiveness of official daily foreign exchange― 90 ―

Intervention in the Foreign Exchange Market and Exchange Rates in Japan
market intervention operations in Japan,” NBER Working Paper 9648.
Fatum, R., and Pedersen, J. (2009) “Real-time effects of central bank intervention in the euromarket,” Journal of International Economics 78 (1), 11-25.
Kaminsky, G. and Lewis, K. (1996) “Does foreign exchange intervention signal futuremonetary policy?” Journal of Monetary Economics 37, 285-312.
Kim, S., and Le, A. T. (2010) “Secretary of Bank of Japan’s yen intervention: Evidence ofefficiency from intra-daily data,” Journal of the Japanese and International Economies
24 (3), 369-380.
Klein, M. and Rosengren, E. (1991) “Foreign exchange intervention as a signal of monetarypolicy,” New England Economic Review, May/June, 39-50.
Marsh, I. (2010) “Order flow and central bank intervention: An empirical analysis of recent
Bank of Japan actions in the foreign exchange market,” Journal of International Moneyand Finance 30, 377-390.
Pasquariello, P. (2010) “Central bank intervention and the intraday process of priceformation in the currency markets,” Journal of International Money and Finance 29,1045-1061.
Reiz, S. and Taylor, M. P. (2008) “The co-ordination channel of foreign exchangeintervention: a nonlinear microstructural analysis,” European Economic Review 52,
55-76.
Shah, M. K. A., Z. Hyder, and M. K. Pervaiz (2009) “Central bank intervention and exchange
rate volatility in Pakistan: An analysis using GARCH-V model,” Applied Financial
Economics 19, 1497-1508.
Yamori, N., and Kurihara, Y. (2004) “The day-of-the-week effect in foreign exchange
markets: Multi-currency evidence,” Research in International Business and Finance 18(1), 51-57― 91 ―