Foreign exchange market intervention and domestic monetary control in Japan, 1973–1989

Abstract

The paper presents an empirical analysis of official foreign exchange market intervention and domestic monetary control in Japan during the recent period of flexible exchange rates. It shows that: (1) the authorities, a net purchaser of foreign exchange over this period, intervened decisively during 1978–1983 and 1985–1989; and (2) they began to accomodate a greater portion of the resulting reserve inflows in 1985. However, this greater reserve accommodation probably was not the principal cause of the recent surge in broad money growth. More likely, it was the lower interest rates and financial market liberalization that precipitated the rapid monetary expansion, which in turn facilitated the greater accommodation of reserve inflows.