Currency intervention and the global portfolio balance effect: Japanese lessons |
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Institution: | 1. Swiss National Bank, Switzerland;2. Monetary and Economic Department, Bank for International Settlements, Switzerland;3. University of Tokyo, Japan;1. Department of Finance, College of Business, Florida State University, 311 Rovetta Building, Tallahassee, FL 32306-1110, United States;2. Department of Business Administration, College of Business, Pusan National University, San 30, Jangjeon-dong, Keumjeong-gu, Busan 609-735, South Korea;1. Department of Radiation Oncology, National Cancer Center Hospital, Chuo-ku, Japan;2. Department of Radiology, Keio University School of Medicine, Shinjuku-ku, Japan;1. Department of Vascular Surgery, Cleveland Clinic, Cleveland, Ohio;2. Department of Nephrology and Hypertension, Cleveland Clinic, Cleveland, Ohio;3. Department of Interventional Radiology, Cleveland Clinic, Cleveland, Ohio;4. Department of Vascular Surgery, Palmetto Health-University of South Carolina, Columbia, SC |
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Abstract: | This paper extends the analysis of Bernanke et al. (2004) to show that the official Japanese purchases of foreign exchange in 2003–04 seem to have lowered long-term interest rates not only in the United States, but 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 global portfolio rebalancing spread the resulting decline in US dollar yields to bond markets in other currencies, thus easing global monetary conditions. We also show that the global portfolio balance effect is detectable in the response of yields to large Japanese intervention in data before and after 2003/04, though the effect is weaker. While our findings contribute to a growing body of work that points to common responses across bond markets to official portfolio shifts in the form of large-scale bond purchases (“quantitative easing”), our analysis has the advantage of focusing on a pure portfolio shock. |
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Keywords: | Intervention Portfolio balance effect Japan Bond market |
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