What prompts Japan to intervene in the Forex market? A new approach to a reaction function

Takatoshi Ito, Tomoyoshi Yabu

Research output: Contribution to journalArticlepeer-review

71 Citations (Scopus)


This paper estimates and analyzes the reaction function of Japanese intervention in the foreign exchange (Forex) markets, using daily Japanese intervention data from April 1, 1991 to December 31, 2002. A theoretical friction model is adopted to describe the intervention as cost-minimizing behavior. An ordered probit model, consistent with the theoretical model, is employed to estimate authorities' reaction function. A noise-to-signal ratio is applied in selecting the optimal cutoff point in estimated ordered probit function. Major findings are as follows: (1) A regime change in June 1995 from small-scale frequent interventions to large-scale infrequent interventions is detected; (2) the optimum cutoff is higher in the first half than the second half.

Original languageEnglish
Pages (from-to)193-212
Number of pages20
JournalJournal of International Money and Finance
Issue number2
Publication statusPublished - 2007 Mar
Externally publishedYes


  • Central bank intervention
  • Foreign exchange rates
  • Ordered probit
  • Political cost

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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