QuestionWhat is foreign exchange intervention? Who decides and conducts foreign exchange intervention?
Foreign exchange intervention is conducted by monetary authorities to influence foreign exchange rates by buying and selling currencies in the foreign exchange market. Foreign exchange intervention is intended to contain excessive fluctuations in foreign exchange rates and to stabilize them.
In Japan, foreign exchange intervention is to be carried out under the authority of the Minister of Finance. As stipulated in the Act on Special Accounts and the Bank of Japan Act, the Bank conducts foreign exchange interventions on behalf of and at the instruction of the minister.
Operations for Foreign Exchange Intervention
The Bank reports to the Ministry of Finance (MOF) information it has gathered regarding the foreign exchange market every day. When the Bank is notified that the minister deems it necessary to intervene in the foreign exchange market, the Bank provides the MOF with background information on the fluctuations in foreign exchange rates and other relevant market information that will facilitate making decisions on the intervention. Based on such information, the MOF gives the Bank specific instructions for foreign exchange intervention, and the Bank then conducts such intervention.
The Bank, as the agent of the Minister of Finance, may entrust the conducting of intervention to foreign monetary authorities.
Funding for Foreign Exchange Intervention
As foreign exchange intervention involves buying and selling currencies, it requires funds such as Japanese yen and U.S. dollars. In Japan, the Foreign Exchange Fund Special Account (FEFSA), which falls under the jurisdiction of the MOF, is used for foreign exchange intervention.
For example, when foreign exchange intervention is conducted by buying U.S. dollars against yen in the foreign exchange market in response to a sharp rise (appreciation) of the yen, the yen funds to be sold are raised by issuing financing bills (FBs). On the other hand, when foreign exchange intervention is conducted by selling U.S. dollars against yen in the foreign exchange market in response to a sharp drop (depreciation) of the yen, U.S. dollar funds held in the FEFSA are used to buy yen.
Information on the timing and amount of foreign exchange interventions is available at the Foreign Exchange Intervention Operations page on the MOF website (Link to an external website).
For more information, see Outline of the Bank of Japan's Foreign Exchange Intervention Operations.