Currency intervention and the global portfolio balance effect: Japanese lessons

This paper shows that the Japanese foreign exchange interventions in 2003/04 seem to have lowered long-term interest rates in a wide range of countries, including Japan. It seems that this decline was triggered by the investment of the intervention proceeds in US bonds and that a global portfolio balance effect spread the resulting decline in US yields to other bond markets, thus easing global monetary conditions.

JEL classification: E5, G12, O24.

Keywords: Intervention, portfolio balance effect, Japan