Outline of the Bank of Japan's Foreign Exchange Intervention Operations
Revision: March 2018
Bank of Japan
Financial Markets Department
Foreign Exchange Division
Since the introduction of a floating exchange rate system in February 1973, the Japanese economy has experienced large fluctuations in foreign exchange rates. In order to mitigate the negative influence of such fluctuations on the Japanese economy, foreign exchange market interventions (hereafter "foreign exchange interventions" or simply "interventions") have been conducted as needed. This article will briefly explain foreign exchange intervention, focusing on the practical side.
II. What Is Foreign Exchange Intervention?
Foreign exchange intervention is defined generally as foreign exchange transactions conducted by monetary authorities with the aim of stabilizing exchange rates. In Japan, the Minister of Finance is legally authorized to conduct interventions as a means to achieve foreign exchange rate stability, under Article 7, Section 3 of the Foreign Exchange and Foreign Trade Act which stipulates that "the Minister of Finance shall endeavor to stabilize the exchange rate of Japanese currency by taking necessary measures such as the buying and selling of foreign means of payment". The Ministry of Finance officially announces the total amount of interventions.
The Bank of Japan, as the agent of the Minister of Finance, executes foreign exchange interventions in accordance with the directions of the Minister of Finance by using the Foreign Exchange Fund Special Account (hereafter FEFSA).1
The Bank, as the agent of the Minister of Finance, may also request foreign monetary authorities to conduct interventions on behalf of the Bank ("entrustment intervention").2 Entrustment intervention is also conducted in accordance with the directions of the Minister of Finance by using FEFSA.
Aside from these cases, the Bank may conduct interventions based on the requests of foreign monetary authorities ("reverse-entrustment intervention").3 Also, there are some cases where interventions are jointly conducted by several monetary authorities by using their respective funds at the same time or continually ("joint intervention").
- The Bank of Japan Act stipulates that the Bank should buy and sell foreign exchange "as an agent of the government......, when its purpose is to stabilize the exchange rate of the national currency" (Article 40, Section 2).
- "Entrustment intervention" means interventions that are conducted in overseas markets with funds of the Japanese authority. It is different from the interventions that are conducted in overseas markets with funds of respective foreign monetary authorities.
- The funds of foreign monetary authorities are used in this kind of intervention.
III. Operational Procedures of Foreign Exchange Intervention
When the Bank conducts foreign exchange interventions as the agent of the Minister of Finance as explained above, the Foreign Exchange Division of the Financial Markets Department (hereafter BOJ Forex Division) is responsible for the front operation, and the International Operations Division of the International Department acts as the back office (hereafter BOJ back office).
A. Collecting Information
The BOJ Forex Division closely monitors and analyzes developments in foreign exchange markets through frequent contact with market participants, the Bank's overseas offices, and foreign central banks, as well as by utilizing the services of information vendors. In addition, the BOJ Forex Division carries out research on developments in the areas which relate to foreign exchange markets, such as overseas bond and stock markets as well as commodity prices.
Information gathered in these ways is reported to the Policy Board and other related sections of the Bank as one of the factors used to judge the status of Japan's economy. Also, as the agent of the Minister of Finance, the BOJ Forex Division reports such information every day to the Foreign Exchange Markets Division of the International Bureau of the Ministry of Finance (hereafter MOF Forex Division), which is in charge of foreign exchange intervention in the Ministry.
B. Decision-Making on Foreign Exchange Intervention
When foreign exchange rate developments are regarded as too volatile and the Minister of Finance decides to conduct an intervention, the MOF Forex Division informs the BOJ Forex Division of such decision. The BOJ Forex Division supplies background information on the volatile movements and other relevant information for making a decision on the intervention.
The MOF Forex Division gives the BOJ Forex Division specific directions for the intervention, and the BOJ Forex Division executes it. The BOJ Forex Division continues to monitor market developments in parallel with the intervention and provides the MOF Forex Division with market information, such as market reactions to the intervention. There are some cases where the method of intervention is modified based on such information.
Once the Bank reaches an agreement on the terms for transactions related to the intervention and makes a contract with the counterparty, the BOJ back office takes care of the remainder of the business.
The BOJ back office confirms with the counterparty the terms of the contract over the telephone or by SWIFT,4 based on the contract records sent from the BOJ Forex Division. Then, the BOJ back office proceeds to settlement. Settlement for an intervention is made, in principle, through authority's account at the central bank whose currency is the subject of the intervention.
- 4A data telecommunication system for transmitting messages relating to international transactions by financial institutions.
IV. Financing and Investment of Funds for Foreign Exchange Intervention
Lastly, this section will briefly explain how interventions are financed as well as the investment of foreign exchange reserves, which have been accumulated partly as a result of interventions.
Intervention by the Bank as the agent of the Minister of Finance is conducted by using the FEFSA, the account of the Japanese Government.5 In the case of U.S. dollar buying/yen selling intervention, for example, the yen funds to be sold are raised by issuing Financing Bills (FBs). In the case of U.S. dollar selling/yen buying intervention, U.S. dollar funds held in the FEFSA are used for buying yen.
The Japanese Government holds large amounts of foreign assets in the FEFSA, partly as a result of foreign currency buying/yen selling interventions in past yen appreciation phases. The foreign assets held in the FEFSA are managed with maximum care to prevent any disruptive impact on financial or foreign exchange markets and managed with maximum attention given to safety and liquidity, while profitability should be pursued. The BOJ back office also plays a role, including settlements, in the implementation of such foreign currency funds investment.
- 5The FEFSA system consists of two elements: the Foreign Exchange Fund and the narrowly defined FEFSA. The former is a fund prepared for foreign exchange trading by the Government. Purchases/sales of foreign currency by this fund are not recorded as the revenues/expenses of the Government. In the latter, results of trading such as (1) profits/losses arising from foreign exchange trading and (2) payments/receipts of interest arising from fund-raising/investment accompanying foreign exchange intervention are recorded as the revenues/expenses of the Government.