Foreign exchange intervention and exchange rate exposure: evidence from South Africa and Japan

Foreign exchange (forex) interventions by central banks have become increasingly frequent in emerging markets. While the effects of these interventions on exchange rate volatility are well-documented, their implications for broader country-level outcomes remain underexplored. This study posits that forex interventions should affect a country’s sensitivity to currency movements, particularly influencing its cash flows. It examines this hypothesis by analysing the impact of forex interventions on exchange rate exposure in South Africa, an emerging market, and Japan, a developed economy, using quarterly data from January 1996 to December 2023.The study utilizes the Kalman filter to estimate time-varying exchange rate exposure and applies quantile regression to explore the relationship between forex interventions and exchange rate exposure. The findings reveal that interventions generally have a negative effect on the absolute values of exchange rate exposure. Specifically, in South Africa, negative central bank interventions show a significant negative effect at the 50th quantile. In Japan, however, these interventions exhibit a positive effect from the 50th to the 90th quantile. Additionally, the study examines the effect of currency depreciation during periods of negative intervention but does not find statistically significant results. The research underscores the importance of credible communication from policymakers regarding the objectives of central bank interventions, as this could help firms better manage potential currency risks.