Japan's Currency Intervention Regimes: A Microstructural Analysis with Speculation and Sentiment

his paper provides a unique examination of three sep- arate regimes of Japanese currency interventions between 1991 and 2004. It is the first research to jointly test the coordination and signalling chan- nels and the reaction function of central banks in an identified structural framework. The empirical research also involves testing an innovative microstructure framework considering 'sentiment' and fundamental infor- mation. There are several important findings based on the analysis of the pa- per. Firstly, the shocks to the bond yield differential are the key driving force of the dynamics of the JPY/USD exchange rate, and have a strong long-run impact on speculation and sentiment. Secondly, with respect to the reaction function of the central bank, the interventions happened in clusters, and were the reactions to sharp appreciations of the JPY ap- preciation. Between 2003 and 2004, the central bank also reacted to the large speculation position and high sentiment on the yen's appreciation. Thirdly, the signalling channel was effective when the interventions were frequent. Fourthly, speculation and sentiment had strong effects on the changes in the exchange rate, and the coordination channel worked when the changes in exchange rate volatility were slow.