【公的な介入と飛び交う噂📡】Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is It Effective and Through Which Channel Does It Work?🌟BoJ Report No.2📚

In order to investigate which transmission channel of intervention is at work, three categories of intervention are defined:
Actual intervention of which the market is aware (proxied by official intervention on days when there is a rumor of intervention),
actual intervention of which the market is unaware (proxied by official intervention on days when there is no rumor of intervention),
and perceived intervention when no actual intervention occurs (proxied by days when there is a rumor of intervention but no official intervention).

Testing the hypothesis of effectiveness separately for each category of intervention provides insight on effectiveness as well as on the channel of transmission as follows.

The signaling channel can only be at work when the market is aware of or thinks intervention occurs (otherwise a signal about future policy intentions and fundamentals will go unnoticed, in which case it is not possible for the signaling channel to function), thus effectiveness of the first and the third category of intervention is consistent with signaling.

The portfolio balance channel can only be at work when an intervention is actually carried out (otherwise the relative demand and supply of foreign and domestic assets do not change, in which case it is not possible for the portfolio balance channel to function), thus effectiveness of the first and the second category is consistent with portfolio effects.

The existing literature combining intervention data with newswire reports of intervention typically uses firm newswire reports of intervention to indicate whether the market is aware of an intervention or whether an intervention is carried out in secrecy.7

However, a firm report of intervention is typically on the newswire the day after the intervention the report refers to is carried out.
For example, a firm report of the January 12, 1999 official Japanese intervention operation is reported on the newswire on January 13, 1999.

Therefore, whether or not an intervention is reported is generally a matter of “after-the-fact” information that can play no role in the contemporaneous exchange rate response to intervention.
By contrast, rumors and speculation of intervention are generally picked up by the newswire the same day they occur.

Accordingly, the analysis of this paper uses rumors or speculation of intervention rather than firm reports of intervention to indicate market awareness as well as market perception of intervention.

7:See, for example, Dominguez and Frankel (1993b, chapter 7).

A premise of this approach is that not all interventions are carried out when a rumor of intervention is reported, and not all rumors of intervention are reported when intervention is carried out.

As it turns out, over the full sample period under study, official Japanese intervention occurs on a total of 159 days while a rumor of intervention occurs on a total of 269 days.

A total of 92 (of the 159) intervention days are also days on which a rumor occurs.
Since not all official intervention days coincide with a rumor, and not all rumor days coincide with an official intervention, the data encompasses three official intervention-rumor of intervention combinations.8

This facilitates the creation of the aforementioned three types of intervention categories and, in turn, the hypothesis testing of effectiveness separately for each intervention category.

8:There are four (two times two) official intervention-rumor of intervention combinations.
Official intervention on a day when there is a rumor of intervention; official intervention when there is no rumor of intervention; rumor of intervention on a day when there is official intervention; rumor of intervention when there is no official intervention.

However, since official intervention on a day when there is a rumor of intervention is equivalent to rumor of intervention on a day when there is official intervention, there are, effectively, only three different combinations.

 The analysis also assesses the impact of official statements (sometimes referred to as “oral intervention” or “central bank communication”) and whether the first day of intervention after a day, or days, of no intervention, and whether the first day of no intervention after a day, or days, of intervention, significantly influence exchange rate movements.