QUANTITATIVE EVALUATION OF FOREIGN EXCHANGE INTERVENTION AND STERILIZATION IN JAPAN: A FLOW-OF-FUNDS APPROACH

The frequency of foreign exchange intervention by the Ministry of Finance of Japan (MOF) increased dramatically between 2001 and 2004. The Bank of Japan (BOJ) acting as the agency of MOF has also intervened in the short-term money market by itself, from time to time, to sterilize the yen flooding into it. However, the effectiveness of the operations could be different from one type of operation from the other because the transactions taken place between the monetary authorities and the private sectors are completely different. It is why we have employed asset-liability-matrix (ALM) derived from the flow-of-funds accounts to evaluate the effectiveness of each type of operation. The results can be summarized as follows. 1) Foreign exchange interventions are effective only when the dollar bought in the operation is invested abroad, that is either in the form of U.S. TBs, T-Notes or deposits in FRB or ECB. 2) Only in some cases, sterilization cancels out the effects of foreign exchange interventions. It depends on the type of the operation BOJ chooses. 3) Some type of non-sterilizing money-market operation unintentionally cancels out the effects of foreign exchange intervention. The conclusion is that the effectiveness of the foreign exchange interventions as well as the money- market operations largely depends on the type of the operation. It is worthless to examine the effectiveness of the operations without going into the details.Presented 14th International Conference, San Antonio, Texas, May 2004.