What Is Foreign Exchange Intervention?

A. Definition and the Legal Status of Intervention

Foreign exchange intervention is defined generally as foreign exchange transactions conducted by the monetary authorities with the aim of influencing exchange rates. In Japan, the Minister of Finance is legally authorized to conduct intervention as a means to achieve foreign exchange rate stability.1 The Bank of Japan, as the agent of the Minister of Finance, executes foreign exchange intervention operations in accordance with the directions of the Minister of Finance.2 The expression "Bank of Japan Intervention," often used in newspapers and other news media, might therefore be misleading (for an international comparison of foreign exchange intervention systems, please refer to the appendix).




1 The Foreign Exchange and Foreign Trade Law stipulates that the "Minister of Finance shall endeavor to stabilize the external value of the yen through foreign exchange trading and other measures" (Article 7, Section 3).

2 The Bank of Japan Law stipulates that the Bank buy and sell foreign exchange "as the agent of the government......,when its purpose is to stabilize the exchange rate of the national currency" (Article 40, Section 2). The Foreign Exchange Fund Special Account Law stipulates that the Minister of Finance may entrust operations involving the Foreign Exchange Fund that are stipulated in the Article 5 to the Bank of Japan (Article 6, Section 1).

B. Types of Foreign Exchange Intervention

Foreign exchange interventions are usually conducted in the Tokyo market. However, as most of the trading shifts to European markets after around 5:00 p.m. JST and then to the New York market, in cases where it is considered necessary to intervene during these hours, the Bank of Japan, as the agent of the Minister of Finance, requests foreign monetary authorities to conduct interventions on behalf of the Bank ("entrustment intervention"). The final decision to use this method is made by the Minister of Finance. The details of the intervention including the amount, currency pair, and method of intervention are also determined by the Minister. The funds necessary for intervention come from the Foreign Exchange Fund Special Account (explained later) irrespective of the market where the interventions are conducted.3 Similarly, when foreign monetary authorities need to intervene in the Tokyo market, the Bank can conduct interventions on their behalf upon request ("reverse-entrustment intervention").4

There are cases where two or more monetary authorities implement intervention jointly by using their own funds at the same time or in succession. This is called "coordinated intervention."




3 "Entrustment intervention" means intervention that is conducted in overseas markets with funds of the Japanese authorities. It is different from the intervention that is conducted in overseas markets with funds of respective foreign monetary authorities.

4 The funds of foreign monetary authorities are used in this kind of intervention.

C. Purpose of Foreign Exchange Intervention

The Foreign Exchange and Foreign Trade Law stipulates that the Minister of Finance shall endeavor to stabilize the external value of the yen by taking necessary measures including foreign exchange transactions.