a)In recent months, the Central Bank of Japan (BOJ) has been actively trying to

Question

a)In recent months, the Central Bank of Japan (BOJ) has been actively trying to prevent the appreciation of the value of the Yen against the US dollar. If the BOJ wants to leave the Yen money supply unchanged while intervening in the foreign exchange market, describe how it will conduct a sterilized intervention?

b)Suppose the united States asked China and Japan to adopt expansionary fiscal and monetary policy so as to increase their demand for US exports. Discuss if such external pressures would help in reducing the US current account deficits. Assess the impact of the respective policy change.

Explanation / Answer

a)

In the case of Japan, with the 0% bid interbank rate policy, for all practical purposes the level of the yen is not a function of sterilized vs unsterilized intervention. That being said, because sterilized intervention does result in more securities and fewer clearing balances, longer term rates could be a touch higher than otherwise. This would also depend on what maturities the BOJ offers for sale. So, to the extent that the yen is a function of the term structure of rates, the different intervention policies would have different outcomes.

In either case, intervention does keep the yen from rising and either case adds net yen nominal wealth to the private sector. Whether one

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.