The Effects of Japanese Foreign Exchange Intervention GARCH Estimation and Change Point Detection

In this paper we test for the short-term impact of foreign exchange intervention on both the level of the yen/dollar exchange rate and the volatility in the yen/dollar markets. Using newly released data on Japanese foreign exchange intervention, our global GARCH estimation suggests that Japanese foreign exchange interventions between 1991 and 2002 had the intended effect on the same day, but at the cost of higher exchange rate volatility. Testing for the robustness of this finding we show that the results are highly dependent on the time period. From 1991 to 1998 Japan's official currency purchases were unsuccessful and coincided with increased exchange rate volatility. Since 1999 official Japanese currency purchases seem to have had the intended short-term effect while exchange rate volatility is lower. To this end, the paper provides evidence for successful foreign exchange intervention on the same day in Japan's liquidity trap where the borderline between sterilized and unsterilized foreign exchange intervention became blurred