The trend effect of foreign exchange intervention

• The 2022 and the 2010–2011 Bank of Japan interventions are infrequent and unusually large-scale • They provide an opportunity for investigating whether such interventions are capable of generating trend effects • We estimate the counterfactual exchange rate and analyze the trend of the gap sequence between actual and counterfactual rates • Our results suggest that the trend of the gap sequence reversed in the desired direction around the intervention dates • Our results indicate that the intervention policy instrument has the potential to generate long-term trend effects The 2022 and the 2010–2011 Bank of Japan interventions provide an opportunity for investigating whether unusually large-scale and infrequent interventions are capable of generating trend effects. To this end, we estimate the counterfactual exchange rate and analyze structural changes in the level and the trend of the gap sequence between actual and counterfactual exchange rates. Our results show that the trend of the gap sequence reversed in the desired direction around the intervention dates, indicating that the intervention policy instrument is potentially powerful enough to generate long-term trend effects. This is an important insight not previously found in the intervention literature.