How central banks intervene in the foreign exchange market

After 1973, the internationalforeign exchange marketThe floating exchange rate system implemented in China is not complete, and the price of the exchange rate is not completely determined by the market. Western countries have to intervene when the exchange rate is unfavorable to them.

Why do these countries want to intervene in the exchange rate? What means are used to intervene in the exchange rate? How effective is the intervention? According to my observation for many years, I think there are two main factors for countries to intervene from their own interests. One is for the needs of domestic and foreign trade policies. A country's currency is priced lower in the foreign exchange market, which will inevitably benefit the country's exports, and if there are too many exports or the exchange rate is too low, it will cause opposition from other exporting countries. Similarly, if the exchange rate issue is not handled well at home, it may become a political issue and affect the government's governance. From these two aspects, the country needs to adjust or intervene in the exchange rate.

In order to protect exports, countries will directly intervene in the foreign exchange market when their own currencies continue to be strong. Intervene the exchange rate by selling their own currency and buying other countries' currencies to make the exchange rate reach a level that they are satisfied with, or to make the exchange rate beneficial to their own interests. For example, in the second half of 2002, the Bank of Japan and the government made continuous verbal statements to intervene in the foreign exchange market, because the continued strengthening of the yen has seriously hindered Japan's exports, slowed down Japan's economic recovery and stagnated its economy. As we all know, Japan is a country whose exports account for a considerable proportion of the national economy, and exports are the life infra of the country's economy. This is the best reason to enter the market for intervention.

When a country expands its exports through currency devaluation, which affects the interests of other countries, it may invite opposition from other countries. Sometimes it is forced to let its own currency appreciate. Take Japan as an example. We know that China is now Japan's largest trading country, and Japan's exports are closely related to China. In early 2002, the continued depreciation of the yen seriously hurt China's exports, which caused dissatisfaction in China. When we heard China's finance minister Xiang Huaicheng claim that although the yen is weak and the yuan is determined not to depreciate, the Japanese government should also weigh the words of this largest trading partner. In order to ease China's dissatisfaction with Japan's devaluation of the yen to stimulate exports, the Bank of Japan had to let the yen strengthen. Governments intervene in exchange rates to strengthen or weaken their currencies in accordance with their own interests from economic and political perspectives.

The second is to curb domestic inflation. Under a floating exchange rate, if a country's currency is chronically below the equilibrium price, it will definitely stimulate exports for a certain period of time, resulting in a trade surplus, which will eventually lead to higher prices and higher wages in the country. Over time, it will lead to inflation. In economic theory, if there is inflation, the country's economic growth may be offset, resulting in a depreciation of the currency despite the prosperity of the economy. Although wages rise, relative purchasing power may shrink and living standards may not rise. This is often seen as the authorities' mismanagement of the macroeconomy, and the country's government is often blamed and even loses in general elections.

How should we respond when intervening?

To clarify the essence and effect of a country's central bank (the European Central Bank is the common central bank of several countries, but the role is the same) intervening in the foreign exchange market, it is also necessary to recognize the impact of such intervention on the supply and policy of the country or the region's currency. The central bank's intervention in the foreign exchange market can be divided into two types: no change in monetary policy and change in existing policy. Intervention without changing monetary policy means that the central bank believes that sharp fluctuations in foreign exchange prices or deviations from long-term equilibrium are a short-term phenomenon, and hopes to change the existing foreign exchange price without changing the existing money supply. In other words, it is generally believed that changes in interest rates are the key to exchange rate changes, and the central bank attempts to change the exchange rate of the national currency without changing domestic interest rates. Now the Bank of Japan wants to intervene by using this method.

In this case, the country's central bank can take a two-pronged approach: the central bank buys or sells foreign exchange in the international foreign exchange market, and sells or buys bonds in the domestic bond market, so that the exchange rate changes without the interest rate changing. For example, in the second half of 2001, the Japanese government wanted to adopt a policy to support the dollar, which caused the yen exchange rate to fall. Then it bought dollars and sold yen in the foreign exchange market. Due to the large number of dollars purchased, the dollar became the reserve currency of the Bank of Japan. Outside the central bank, the circulation of yen increased, which increased the supply of yen, and Japan may have to cut interest rates appropriately in order to maintain the money supply.

In the current situation, the interest rate of the yen is almost zero, and there is little chance that it can be lowered. To offset the impact of foreign exchange buying and selling on domestic interest rates, the Bank of Japan can sell bonds in the domestic market, so that the yen reserves are increased and the yen in circulation in the market is reduced. The less substitutable domestic and international bonds are, the more effective the central bank's intervention without changing monetary policy will be, otherwise it will be ineffective. Therefore, the probability of success of the Bank of Japan's intervention in the foreign exchange market is small in recent years.

By making statements in the foreign exchange market, the central bank intervenes verbally to influence the change of the exchange rate and achieve the effect of intervention. This becomes a signal to intervene in the foreign exchange market. The central bank does this to warn the foreign exchange market that its monetary policy may be about to change.

In the foreign exchange market, when these signals are initially encountered, there will be some reactions that will move the exchange rate in the direction the central bank wants. Once the country's central bank repeats the same words repeatedly for a certain period of time, and no substantial intervention occurs, then the market reaction may gradually slow down, or even ignore it, and instead move the exchange rate in the opposite direction. Now that the market has become numb to the intervention of the yen, we observe that the exchange rate of the yen is still strengthening repeatedly. Foreign exchange market intervention to change monetary policy: This is a change in the monetary policy of the central bank. It refers to the direct purchase and sale of foreign exchange by the central bank in the external market, so that the domestic currency in the supply and interest rates are in the direction of intervention that is beneficial to its own reach. This is the policy adopted by the central bank when it sees that the exchange rate of the domestic currency has deviated from the equilibrium price for a long time For example: Before the birth of the euro, Germany's currency, the mark, was a very strong currency, and Germans regarded the mark as their pride. At that time, in order to maintain the strength of the mark, the Bundesbank kept selling foreign currency in the foreign exchange market to buy the mark. Due to the decrease in the circulation of the mark, the supply of the mark decreased, and the interest rate of the mark began to rise. People were willing to store the mark in foreign exchange, which caused the exchange rate of the mark to rise. This kind of intervention is generally very effective, at the cost of domestic monetary policy.

We judge whether the intervention of a country's central bank in the market is effective, not by the number of times the central bank intervenes and the size of the cost. I observe the following situations: a country's exchange rate is high or low for a long time. If this reason is due to the country's macroeconomic level, interest rates and the government's monetary policy, then the central bank's intervention is ineffective for a certain period of time. The central bank needs to intervene to achieve two purposes. First, the central bank of the country may want to moderate the decline or rise of the national currency in the foreign exchange market to avoid the impact of the exchange rate fluctuation in the foreign exchange market on the domestic economy. Second, if a central bank intervenes in the foreign exchange market, it will have a certain impact in the short term. The market needs a certain amount of time to digest the intervention. This allows the central bank a certain amount of time to adjust its monetary policy. The success of a country's intervention in exchange rates sometimes depends on the attitude of other countries' central banks. In the development of the world economy, it is impossible for a country's economy to be isolated from the world economy. On the contrary, the economy of a country, or even the economy of a region, is increasingly connected with the world economy. Often violent fluctuations in a country's exchange rate will cause dissatisfaction or even warnings from countries with which it has close economic relations. Because its exchange rate fluctuations harm the interests of other countries.

For example, the Japanese government does not want the yen to appreciate rapidly. Why? Japan's domestic market is small and domestic demand has been weak for a long time. The Japanese government relies on Japan's foreign exports to keep the economy growing. GDP rose by 0.6 in the first half of 2002 and 0.7 in the third quarter.

Since November 2001, the Bank of Japan has intervened in the foreign exchange market seven times, hitting the yen to the 135 water level. Due to the weakness of the yen, it has promoted the export of Japanese trade. After the sharp depreciation of the yen, think about it. It took a huge wave of 2,000 points to boost Japan's GDP, the second giant of the economy, to 0.6 economic growth, which is less than one-tenth of China's. Therefore, the Japanese government very much hopes that the yen will depreciate.

Japan relies on trade to export, and its biggest trade enemy should be the United States. The trade deficit between the United States and Japan, the trade war between the United States and Japan, everyone should have heard of it at many times, mainly in the car war. So everyone should pay attention to one issue. The success of Japan's intervention in the foreign exchange market does not depend on the Japanese government, but on the US government. Is Japan's economy doing well now? So many trillion yen bank bad debts. After Takenaka came to power, he proposed to take active measures to eliminate bad debts in the Japanese banking system. This will undoubtedly make things worse. The Japanese government hopes that the depreciation of the yen will bring the Japanese economy out of the trough.

The yen reached 147 in June 1998. The Japanese government intervened in the yen at that time, and the US government invested 2 billion US dollars in one day to help the Japanese government stop the weakness of the yen. It can be seen that the Japanese government intervenes in the foreign exchange market, depending on the Americans. If the US government tolerates and allows the depreciation of the yen, the success rate of Japanese government intervention in the yen is relatively high.