Handbook of Exchange Rates

26.1 Introduction

On September 15, 2010, the Bank of Japan conducted a massive intervention in the foreign exchange market, buying a market-estimated USD 24 billion in order to weaken the yen. The yen depreciated by about 3%, from below YEN/USD 83 to above 85, on that day. To put the magnitude of this intervention into perspective, this

USD 24 billion single-day intervention is larger than the total of all interventions conducted by the US Federal Reserve since 1990 and more than six times larger than US interventions in the entire year 1985, when United States, European, and Japanese authorities conducted concerted interventions to weaken the US dollar following the famous Plaza Accord. By mid-October 2010, about 4 weeks after the intervention by Japanese authorities, the YEN/USD exchange rate had returned to its preintervention level.¹

Official interventions in FX markets are by no means limited to advanced economies. Quite the opposite: most advanced economies have ceased or at least drastically reduced their direct intervention activity in FX markets over the past 15 years, whereby it has been primarily emerging market economies (EMEs) that have increased substantially their FX interventions. Following the Asian financial crisis of the 1990s, global FX reserve holdings by central banks of EMEs rose from USD 0.838 trillion in 1999 to USD 5.5 trillion in mid-2010 (Table 26.1). China is the largest reserve holder, holding USD 2.6 trillion in Q2 2010, which amounts to more than ...