2002 Japan Conference: A Summary of the Papers

In July 2001, the Japanese Ministry of Finance (MoF) disclosed daily intervention records (date, amount, currency pair) for April 1991 to March 2001. In the future, the intervention record will be disclosed in the same format four times a year. (MoF home page: www.mof.go.jp/english/e1c021.htm). The intervention decision is made in the MoF and the special account of intervention maintains the balance sheet composed mainly with short-term government securities, Financial Bills, liabilities, and foreign assets as assets.

An examination of the data reveals the following features. There were 200 instances of yen-dollar intervention in the ten years, of which 165 occurred before June 20, 1995, the day Mr. Sakakibara took charge of intervention, and 35 after that date. The dollar was sold and the yen was bought when the yen depreciated vis-à-vis the dollar and vice versa. No dollar-selling intervention was conducted below 125 yen/dollar. The buy-low-sell-high strategy has been profitable, as the yen fluctuated widely between 80 and 145 yen/dollar.

Profits from interventions are the sum of: 1) realized capital gains, profits realized by buying and selling U.S. dollars; 2) unrealized capital gains, that is the difference between the mark-to-market value of the (accumulated) dollar assets at the end of March 2001 compared to their average purchase cost; and 3) realized carrying costs, that is profits/losses resulting from the difference between the interest costs of maintaining the (accumulated) yen liability and the interest income from holding the (accumulated) dollar assets, summed over the ten years.

The estimates are realized gains of 981 billion yen; unrealized gains of 3,665 billion yen; and interest profits of 3,975 billion yen; the sum is 8.6 trillion yen during the ten-year period. So, the interventions indeed were hugely profitable. According to a view that profitable intervention is stabilizing, the Japanese authorities thus contributed to stabilizing the yen-dollar fluctuations.

Next, I analyze the effectiveness of intervention by looking at the 24-hour yen-dollar movement on an intervention day. Of 119 instances of the lean-against-the-wind interventions following yen appreciation, only about half were successful in reversing the trend. If the standard for success is relaxed to be less appreciation because of intervention, then interventions were successful almost 70 percent of the time. There were 19 cases of lean-against-the-wind operations in an attempt to stop yen depreciation. Of those 19 interventions, 10 of them reversed the trend and 17 were successful in at least slowing down the pace of yen depreciation.

Out of 49 interventions to sell the yen as part of lean-in-the-wind operations, the yen depreciation accelerated only 11 times. More than half of the time, the yen appreciated then depreciated on the day of yen-selling interventions that followed some yen depreciation. This may be counter to the conventional wisdom that it is easier to go with the market than against the market. There were only 13 cases of lean-in-the-wind interventions attempting to appreciate the yen, but they were successful in accelerating the yen appreciation, or at least maintaining yen appreciation, more than 60 percent of the time.

Interventions generally were effective, except for a period when the yen appreciated from 100 to 80 in the first half of 1995. The failure of interventions in 1994 through June 1995 may be attributed to too strong a force for yen appreciation despite repeated interventions, or because of a less-than-effective style of intervention. The interventions after June 1995 did tend to be effective. The first intervention in over a week has a larger impact than subsequent interventions. And, the Japan-U.S. joint interventions were the most powerful.

Finally, I estimate a reaction function of Japanese intervention. A large movement on the day before, and the deviation from 125 yen/dollar, tend to prompt intervention. A reaction function in the first half of the period is better estimated than during the second half. Interventions in the second half were much more difficult than in the earlier period.

In sum, Japanese interventions were profitable in the 1990s, and effective in the second half of the 1990s. The joint intervention is much more powerful than the unilateral intervention. And, the success is in part due to unpredictable, infrequent interventions, that is, to large surprises at work.