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

We study the impact of Japanese foreign exchange intervention on the volatility of the yen/dollar exchange rate since the early 1990s based on a GARCH framework. Using daily intervention data provided by the Japanese Ministry of Finance, we show that the success of interventions varies over time. Measured on the total sample between 1991 and 2003 the estimation results for the impact of foreign exchange intervention on the yen/dollar exchange rate volatility are inconclusive. Sub-dividing the sample into yearly sub-periods and into intervention clusters suggests a structural break. From 1991 up to the late 1990s Japanese foreign exchange intervention seems to have increased the volatility of the yen/dollar exchange rate. In contrast in the new millennium, Japa- nese foreign exchange intervention is associated with less exchange rate volatility. Non-arbitrary segmentation by change point detection leads to similar results. The evidence in favour of recent successful Japanese foreign exchange intervention is line with theoretical evidence which implies successful intervention is the case of un-sterilized intervention.