Has Japanese Intervention in the Foreign Exchange Market been Effective?

Abstract

Japanese yen has dropped sharply in 2026. It fell to the lowest level in 40 years against the US dollar. Japan and the US financial authorities performed huge-scale intervention in the foreign exchange market to curb the yen’s depreciation, however, opinions remain divided regarding the effectiveness. This study empirically examines the effectiveness of the intervention from the 2000s employing a portfolio balance approach. It finds that interventions in the foreign exchange market by Japanese financial authorities have been successful; however, their effects were limited to the very short term of only a few days. Furthermore, it is unlikely that the foreign exchange market focuses on the portfolio balance approach; instead, it has been confirmed that speculative sentiment drives market transactions. On the other hand, the market may well be factoring in risk premiums when trading currencies. While it is difficult to determine whether an intervention is a success or a failure, the increasing scale of market trading makes it challenging to achieve significant results from such interventions.