Order Flow and Central Bank Intervention : An Empirical Analysis of Recent Bank of Japan Actions in the Foreign Exchange Market

This paper examines the behaviour of end-user order flows in the foreign exchange market around periods of intense and large-scale intervention activity by the Bank of Japan. First, we find very limited evidence that corporate customers are more than usually likely to be net sellers of yen on days when the Bank of Japan is intervening to sell yen. However, there is somewhat stronger evidence that financial customers are more likely to be net buyers of yen on the same days. Second, using a regression framework we again find evidence that corporate customers react in ways consistent with the presumed intentions of the Bank of Japan, while financial customers act in the opposite way. The aggregate impact of intervention to sell the yen is counterproductive in that it permanently increases net purchases of the yen by the customers of the bank we analyse. Finally, we find very clear evidence that intervention matters in a microstructure analysis. The strong contemporaneous correlation between order flows and exchange rate changes essentially disappears on days in which the Bank of Japan intervenes