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The information base of the study is the time series of the daily exchange rate of the currency pair USD/JPY, the US 10-year Treasury bond (TB 10), the Japanese government bond 10-year (JGB 10), the volatility index (VIX) of the Chicago Board Options Exchange (CBOE), which calculated by Bloomberg. Study period: December 1, 2015 (the date the Federal Reserve raised interest rates, which initiated a new regime – began easing its ZIRP zero interest rate policy) to December 29, 2023. The relationship between monetary policy and the currency pair USD/JPY is evaluated using 3 approaches: 1) a rally dynamic system based on the standard theory of nonlinear differential equations aimed at eliminating psychological noise (1/f noise, pink noise, trend noise with spectrum capacity); 2) regression of instrumental variables with heteroskedasticity aimed at managing unobservable sources of variability; 3) an event tracking method to measure anomalous asset price response, analyzing the daily price action of USD/JPY to detect market-related fluctuations in the exchange rate and separate the impact of general market trends from related differences in interest rates. The study found that the US Federal Reserve’s (Fed’s) monetary policy only occasionally affects the USD/JPY exchange rate, and it changes mainly when monetary policy deviates from expected future trajectories. Within the studied period, this happened only 3 times: growth on December 16, 2015; emergency rate reduction due to COVID-19 on March 15, 2020; and the first increase of 75 basis points on June 15, 2022 (the article estimates the impact of each of these episodes on the exchange rate). Statements by the Fed on monetary policy affect the price dynamics of the USD/JPY pair in the short term (since short-term psychological expectations play a decisive role in shaping the dynamics of the currency market), but not often (if the statement on monetary policy is consistent with market forecasts, it is practically will not affect exchange rates). The Fed’s adoption of tools such as “forward guidance” and official statements to inform the future course of monetary policy indirectly affects the price dynamics of USD/JPY. The price action of USD/JPY was driven by the fundamentals of the difference in interest rates between the US and Japanese bonds, which are influenced by the monetary policy of the US Federal Reserve and the Bank of Japan (BoJ). In 2023, it could be hard to attempt to challenge FX intervention except to curb “excess volatility and disorderly movements in exchange rates” like the Minister of Finance’s (MoF) 2022 intervention.
Masaaki Yoshimori (Tue,) studied this question.