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Bank of Japan's Yen Intervention: Only Coordinated Action Will Make It Effective

October 4, 2010 by Samuel Chong

With Japanese Yen appreciating to the levels of the first intervention of Bank of Japan, the likelihood of a second intervention increases. 

The European Union gave some support on Wednesday to Japan's intervention to weaken the rising yen but said such action would have had more impact if had it been coordinated with others.

"Unilateral actions are not the appropriate way to deal with global imbalances," Eurogroup Chairman Jean-Claude Juncker, on a trip to Switzerland, said when asked about the Bank of Japan's action.

According to a research paper titled "Is Official Foreign Exchange Intervention Effective?" published by the Federal Reserve Bank of San Francisco in 2003, for the 26 central bank interventions that were studied, interventions that were coordinated between the Bank of Japan and the Federal Reserve or the Bundesbank and the Federal Reserve—that is, where both central banks were in the market at the same time—had a larger impact on exchange rates than unilateral foreign exchange operations.  Furthermore, the likelihood of success was greater the larger the volume of intervention and the longer the central bank was persistently "in the market." Moreover, intervention supported by central bank interest rate changes has an even larger impact than intervention alone—but both are effective in moving exchange rates.

Finance Minister Yoshihiko Noda, who will reportedly keep his post after a cabinet reshuffle, indicated Tokyo acted alone on the yen. He said he was in contact with authorities overseas.

But an EU source said Japan had not even informed the Europeans, or the United States, about the intervention.

 

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