Operational Procedures of Foreign Exchange Intervention

The Bank of Japan conducts foreign exchange intervention operations as the agent of the Minister of Finance, as mentioned earlier. The sections engaged in and responsible for intervention operations are the Foreign Exchange Division of the Financial Markets Department (hereafter BOJ Forex Division) and the Planning and Coordination Division of the International Department.5
5 Before the reorganization of May 2000, as a result of which dealers moved to the Financial Markets Department from the International Department, the former Foreign Exchange Division of the International Department had sole responsibility for the operation. In view of the ever closer linkages between domestic and foreign financial markets and the increasingly active cross-border flow of funds, it is expected that both monitoring and analytical ability will be greatly enhanced by the reorganization.
A. Collecting Information
The BOJ Forex Division closely monitors and analyzes developments in foreign exchange markets day and night through frequent contact with market participants, the Bank's overseas offices, and foreign central banks, as well as utilizing the services of information vendors. In addition, the Forex Division carries out research on developments in the areas which relate to the foreign exchange markets, such as developments in overseas securities and stock markets and commodity prices.
Information gathered in these ways is passed to the Policy Board and other related sections in the Bank as one of the factors on which a judgement of the state of financial and business activities in the Japanese economy is based.6 As the agent of the Minister of Finance, the BOJ Forex Division reports such information every day also to the Foreign Exchange and Money Market 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.
6 The Bank of Japan provides the public with information on the foreign exchange market through pre-recorded telephone services. This information includes the highest and lowest values as well as turnover, and is revised every hour. (, Japanese only)
B. Foreign Exchange Intervention Decision-Making
When foreign exchange rate developments are regarded as too volatile, the MOF Forex Division gets in touch with the BOJ Forex Division on the hot line, and is supplied with the background information on the volatile movements and other relevant information for making decision on intervention.
If the Minister of Finance decides to conduct intervention based on such information, the MOF Forex Division gives the BOJ Forex Division specific directions for the intervention. The Minister of Finance determines the details taking into consideration various factors in the foreign exchange markets in order to maximize the effectiveness and efficiency of the intervention. The BOJ Forex Division continues to monitor the market developments in parallel with the intervention and provides the MOF Forex Division with information, such as market reactions to it. There are cases where the method of intervention is modified based on the Bank's report.
C. Settlement
Once a dealer of the Bank reaches agreement on the terms of a transaction and makes a contract with the counterparty, the back office takes care of the remainder of the business. The back office in the Planning and Coordination Division of the Bank's International Department is responsible for confirming the terms of contracts made by dealers in the front office and also for carrying out the transactions (i.e., settlement).
Confirmation is done by matching the terms of contracts with the counterparties over the telephone or by SWIFT,7 based on the contract records kept by the dealers. Having confirmed the contract, the back office proceeds to settlement. Settlement for an intervention is made, in principle, through the authorities' accounts at the central bank whose currency is the subject of the intervention.
7 Abbreviation for The Society for Worldwide Interbank Financial Telecommunication, a data telecommunication system for transmitting messages relating to international banking transactions. The headquarters of the system is located in Brussels, and the Bank of Japan has been a member since 1987.