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Intervention of Foreign Exchange Market in Japan

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Added on  2023-06-04

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This article discusses the intervention of foreign exchange market in Japan during the deflationary period. It covers the methods and mechanisms used by the Japanese government to end deflation and stabilize the financial sector.

Intervention of Foreign Exchange Market in Japan

   Added on 2023-06-04

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Intervention of Foreign Exchange Market in Japan
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Intervention of Foreign Exchange Market in Japan_1
Intervention of Foreign Exchange Market in Japan
The episode below discuss the long deflationary period in the Japanese economy. The
deflationary event forces Japan to undergo several phases in order to recover from the
condition of deflationary. From the episode, it came out clearly the Japanese government
tried to use various ways to end deflationary state which lead to inflation (Chow, 2012).
Japanese different methods and mechanism of intervention such as foreign reserves to
eventually recover from the inflation which was caused by deflationary period (Christina,
2017). In summary, the intervention method that was used by Japan Bank and Japanese
ministry of finance were the main instruments in ending up the situation. Thus, the real life
event of Japanese government foreign market intervention has been discussed below.
Turner and Cardinal (2017) narrates the longest deflationary period which Japan
suffered from the year 1989 to 2008. The economy of Japanese experienced a boom and it
started to gradually decline in the beginning of 1990s and eventually entered a stated known
as deflationary helix in the year 1998. According to Turner and Cardinal (2017) is that during
the deflationary helix period the output activities of Japanese were deteriorating. Thus,
resulting to deflation in a ways of negative inflation tariffs or rates continues and the rate of
unemployment was also escalating. Simultaneously, the confidence that Japanese had in their
financial market started to waned, hence some banks stop to operated or even failed due to
unstable and unfavorable economic conditions (Shelton & Ceyhan, 2015). During this period,
JOP or Bank of Japan which was operating as an independent and legal financial institution
was aiming to stimulate the economy. Its primary objective was to end inflation and stabilize
the financial sector. The availability as well as the effectiveness of the traditional monetary
policy instruments was sternly and constrained because the policy rate of interest was at zero,
which means that nominal rate of interest was almost becoming negative. This situation was
referred as the zero bounding problem or challenge.
Intervention of Foreign Exchange Market in Japan_2
In order to respond to the pressure of the deflationary the Bank of Japan together with
the Ministry of Finance had to intervene by launch, a reserve target program. The first
respond by Bank of Japan was to rise the balance of current commercial bank account to
thirty-five trillion Japanese Yen. Then, the Ministry of Finance utilized the funds to buy
approximately three hundred and twenty billion US dollars in United State treasury bonds
and debt agency.
By the year 2014, the critics of Japan’s currency asserts that the Japanese central bank
was devaluing the Yen either artificially or intentionally. Some of the critics’ event claim that
the 2014 United State and Japan trade deficit of $ -261.7 in billions was increasing the rate of
unemployment in US. According to Agrarians (2014) is that the governor of BOK or Bank
of Korea Kim Choong Soo insisted that Asians countries have to work as one to protect
themselves from effects caused by Japan’s Prime Minister Abe’s Shinzo inflation ending
campaign. Some critics even stated that inflation ending campaign was response to Japanese
constant economy and potential deflationary helix (Agrarians, 2014).
In the year 2013, Japan’s minister of finance Taro Aso highlighted that Japan had
planned to use its foreign exchange market reserves to purchase bonds which were being
issued by ESM or European Stability Mechanism. The Euro-Area potentates were to be
bought for the weakening of the Japanese Yen. According to Brown and Lamarck (2013) is
that United State critics Japan from unilateral undertaking of selling Yen in the year 2011
after attempt of weakening Yen by Seven Group of economies intervention. This happened
after the aftermath record of Tsunami and earthquake in Japan. By the end of the year 2013,
Japanese had approximately $ 1.27 in trillion held in foreign reserves which has was stated by
the ministry of finance data or information.
Evaluation of Japanese Intervention
Intervention of Foreign Exchange Market in Japan_3

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