Foreign Exchange Market Intervention and Domestic Monetary Control in Japan, 1973-89

Abstract

The paper presents an empirical analysis of official foreign exchange market intervention and domestic monetary control in Japan during 1973-89. It shows that: (1) the authorities, a net purchaser of foreign exchange over this period, began to intervene more decisively in 1978; and (2) they began to accommodate a greater portion of the resulting reserve inflows in 1985. This greater reserve accommodation, however, was not the principal cause of the recent surge in broad money growth. Rather, it was lower interest rates and financial market liberalization that precipitated the rapid monetary expansion, which in turn facilitated the greater accommodation of reserve inflows.