An empirical study on the benefits of Japan’s official foreign exchange intervention: based on the change of long-term foreign exchange reserves and their income


(1.Faculty of Economics and Management, East China Normal University, Shanghai, China 200262)

【Abstract】After Nixon shock, Japan began to suppress the appreciation of JPY through long-term foreign exchange intervention. Foreign exchange funds of special account are the reasonable proxy variable of foreign exchange intervention funds. Based on the estimation of the proxy variable, the monthly data on foreign exchange intervention from August 1971 to March 1991 can be calculated, and then the benefits and risks of Japan’s foreign exchange intervention from August 1971 to March 2017 can be explored. The results show that foreign exchange intervention in Japan can both stabilize exchange rate and produce better investment income, especially paper benefits, and investment and operating profit of foreign exchange reserves, and Japan’s official foreign exchange intervention is successful. However, from the perspective of hedging exchange rate risk and interest rate risk, Japan should appropriately reduce its investment in US treasury bonds, and increase investment in other financial products such as the Standard & Poor’s 500 Index instead.

【Keywords】 Japan; foreign exchange intervention; foreign exchange reserve; risk; benefit;


【Funds】 Project of National Social Science Fund of China (14BJY185)

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    [1]. ① The Nixon administration made great adjustment in many aspects such as foreign policy and economic policy at that moment, which had great impact on the politics, economy and society of many countries including Japan. Therefore, this policy is also called Nixon shock in Japan. [^Back]

    [2]. ② It was the Ministry of Economy before 2000. [^Back]

    [3]. ① Sarno and Taylor (2001) adopted relevant data in the 1980s. [^Back]

    [4]. ② Neely (1998), Sarno and Taylor (2001), TIto (2003), Ito (2003) and Leahy (1995) et al. [^Back]

    [5]. ③ The benefits of foreign exchange investment here do not require maximization of the income of foreign exchange assets. It is an important policy means for the government to affect the exchange rate level through foreign exchange intervention. Even though there may have losses in the operation of foreign exchange reserves, it is the cost to be paid to realize specialized policy targets. [^Back]

    [6]. ① They are the profit and loss caused by the differences of bond interest. The main bonds invested by Japan’s foreign exchange reserves is US treasury bonds. Therefore, the interest margin between Japan and the US is the basis of investment income of Japan’s foreign exchange reserves. [^Back]

    [7]. ② This is different from the definition of transaction profit and loss in Japan’s special account: the profit and loss is generated for the difference between actual exchange rate and benchmark exchange rate (generally the average exchange rate during the six months before foreign exchange trading) during foreign exchange trading. [^Back]

    [8]. ③ If the interest rates of Japan and the US reverse, the interest margin income in Japan’s foreign exchange reserves will be damaged, and even may be turned negative. [^Back]

    [9]. ④ If JPY continues to appreciate, the actual exchange rate of USD will be lower than the average exchange rate during purchasing, and the paper profit of foreign exchange reserves is negative income. [^Back]

    [10]. ① The currency of Japan’s foreign exchange intervention is mainly the dollar. Therefore, this paper ignores the intervention of non-dollar currencies (EUR and IDR). [^Back]

    [11]. ② The data thereafter were updated one time per quarter. [^Back]

    [12]. ③ Denominated by JPY. [^Back]

    [13]. ④「為券発行償還調整」. [^Back]

    [14]. ⑤「為券公募発行市中償還調整」. [^Back]

    [15]. ① Foreign exchange intervention funds and the proxy variable are denominated by JPY. [^Back]

    [16]. ② Before 1997, “private repayment from public issuance of FEF-FBs” was not included into “foreign exchange funds,” but into the item of “others” in the special account. Therefore, the “private repayment from public issuance of FEF-FBs” in this period does not need to be adjusted. [^Back]

    [17]. ③ The data sources used in this paper are as follows: the data on foreign exchange funds, “repayment from issuance of FEF-FBs” and “private repayment from public issuance of FEF-FBs” in the foreign exchange fund special account come from Japan’s monthly fiscal report; data on the proportion appropriated to the general account, and the operating profit, transaction income and paper profit of foreign exchange fund special account come from the final accounts statistics; data on FB interest rate, interest rate of US treasury bonds and foreign exchange reserves come from the FRED (https:/research.stlouisfed.rog/fred2); data on S&P Stock Price, interest rate of Japan’s government bonds and the exchange rate of JPY and USD come from the NEEDS; data on foreign exchange intervention funds come from 外国為替平衡操作の実施状況; and data on the proportion of FEF-FBs in terms of term structure come from 外貨準備等の状況. [^Back]

    [18]. ④ In this case, β1 is 0.751, and the value of t is calculated as follows: (0.751 - 1) / 0.043 = −5.79. [^Back]

    [19]. ① The average error is no more than JPY 300 million. [^Back]

    [20]. ② It is also called FEF-FBs. [^Back]

    [21]. ③ The foreign exchange fund special account is the account for Japan to conduct specialized management and operate foreign exchange reserves. [^Back]

    [22]. ④ Part of foreign exchange reserves are held by the Bank of Japan. After 1973, the scale of foreign exchange reserves held by the Bank of Japan did not change much for the constant foreign exchange intervention. In comparison, the funds for US foreign exchange intervention are shared by the Ministry of Finance and the Federal Reserve. [^Back]

    [23]. ① T-Bills, three months. [^Back]

    [24]. ② FB interest rate, three months. [^Back]

    [25]. ③ The operating profit of every term is denominated by JPY. If foreign exchange reserve assets are credited, operating profit shall be included in the item of unrealized gains according to the change of exchange rate of USD against JPY. The situation of operating profit being included in foreign exchange reserve assets (compounding) is analyzed in Part 5. [^Back]

    [26]. ① From the second half of 2010 to the end of 2012, the total income of Japan’s foreign exchange intervention is negative. [^Back]

    [27]. ② It is different from the foreign exchange intervention income in Japan’s “foreign exchange fund special account.” [^Back]

    [28]. ③ Paper profit and loss refer to the unrealized profit and loss in the balance sheet. [^Back]

    [29]. ④ In the end of July 1971, the exchange rate of USD against JPY was USD 1 = JPY 360. Then, USD constantly depreciated, and did not go back to the level of exchange rate in 1971. [^Back]

    [30]. ① Except for 1971–1972, 1975–1977, 1991–1992 and 2008–2017. [^Back]

    [31]. ② The compounding situation is not considered here. [^Back]

    [32]. ③ Japan’s foreign exchange fund special account shows that Japan’s foreign exchange intervention helped gain high interest margin income after 1993 and some surpluses of foreign exchange fund special account were transferred to the general account, which made up for the deficiency of Japan’s finance to a large extent. [^Back]

    [33]. ① The amount of transaction cost is very small. Therefore, this paper ignores it. [^Back]

    [34]. ② After the Second World War, the benchmark exchange rate of USD against JPY was USD 1 = JPY 360, and was adjusted to USD 1 = JPY 308 in December 1971, which lasted for a long time. From 1978, Japan revised the benchmark exchange rate every half year according to the change of previous exchange rate. After 2009, Japan adjusted the benchmark exchange rate every month according to the exchange rates of previous two months. [^Back]

    [35]. ① This is the main reason for the difference of the two calculation results. [^Back]

    [36]. ②「外貨準備等の状況」. [^Back]

    [37]. ③ However, the proportion of FEF-FBs with a period below one year rose in 2014, but the proportion of FEF-FBs with a period above one year but below five years fell. [^Back]

    [38]. ① Japan sets up special accounting budget for specific-purposed expenditure or budget. The special accounting includes fund special accounting, business special accounting and pure special accounting. The foreign exchange fund special account belongs to fund special accounting. The Japanese Ministry of Finance is responsible for management and operation of the account. [^Back]

    [39]. ② The income items of the general account in Japan include tax revenue, and incomes from government bonds. The expenditure items mainly include the expenditure for public services such as social security, administrative management, education, science and culture, and national defense. [^Back]

    [40]. ③ For example, on March 18, 2011, Group of Seven published a statement: the central banks of the United States, the UK, Canada and Europe joined the Bank of Japan to intervene in the foreign exchange market together from March 18; the excessive and disorderly fluctuations of foreign exchange market were not favorable for stable development of economy and finance, so governments of all countries would keep eyes on foreign exchange market and conduct close cooperation when necessary. [^Back]

    [41]. ① Before 1991, JPY was in the state of appreciation. Therefore, the Japanese government’s transacgtion income of foreign exchange was negative during this period. [^Back]

    [42]. ② If JPY is depreciated for 20 points within one year, its paper profits of foreign exchange intervention will increase JPY 15.3 trillion. In addition, in order to restrain the depreciation of JPY, Japan may intervene in the foreign exchange at this moment, which will generate certain transaction income. [^Back]

    [43]. ③ For example, USD-denominated assets account for 10% of GDP. [^Back]

    [44]. ④ The Government Investment Corporation is responsible for the investment and operation of Singapore’s foreign exchange reserves. GIC diversifies the investment of foreign exchange reserves, mainly including investments in foreign negotiable securities, stocks, real estate and private equity, which involve more than 40 countries’ investment products. China Investment Corporation was founded in 2007, and conducts active investment through foreign exchange reserves. The investment scale was up to USD 575.2 billion in 2013. Korea Investment Corporation founded in 2005 invests and operates part of foreign exchange reserves as government assets. The investment scale reached USD 72 billion in 2013. These three institutions all adopt the operation pattern of national sovereign investment funds. [^Back]


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This Article


CN: 22-1065/F

Vol 37, No. 02, Pages 13-27

March 2018


Article Outline


  • Introduction
  • 1 Literature review and the innovation of this paper
  • 2 Selection of the proxy variable for foreign exchange intervention funds
  • 3 Foreign exchange intervention of Japan and the analysis of its benefits
  • 4 Differences in the benefits of Japan’s foreign exchange intervention under different accounting methods
  • 5 Revision on the investment and operating benefits of Japan’s foreign exchange intervention
  • 6 Evaluation on the policy of Japan’s foreign exchange intervention
  • Conclusion
  • Footnote