currencyYesterday, Japan directly intervened in the currency market by selling yen for dollars. How exactly step-by-step does this work mechanistically? Below is my guess of how this works; please confirm or revise it.
Let’s say that Japan decides they want to sell 1B yen in exchange for dollars in order to help exporters. So the BOJ creates out of thin air (electronically) 1B yen and transfers it into some persons account in exchange for a reciprocal transfer of dollars to BOJ’s account. Does the BOJ do this entirely self-sufficiently, or do they require a middle man transaction with the Japanese Treasury? If so, how exactly does this middle man transaction work?
OK, so far so good. Japan has removed dollars from circulation and added yen to circulation therefore causing depreciation of the yen.
What I don’t understand is that BOJ will not just want to sit on these dollars. They will want to purchase US Treasury Bonds in order to achieve some rate of return which subsequently places the dollars back in circulation. I guess the 1B yen is still in circulation and so some depreciation has occurred. Is this correct?
The Bank of Japan is much like the Federal Reserve Bank in the US in that it is and independent entity that has the power to enact monetary policy. The BoJ has the authority to issue bank notes (even electronically).
The BOJ can issue 1b Yen and transfer that Yen to the exchange agent(s).
The exchange agent would then transfer the dollars to the Bank of Japan.
From here the dollars would enter the BoJ's reserve pool. They could choose to buy treasury bonds, retire debt, or hold actual dollars for use in financing. The BoJ is not a standard business with a goal of making profit so I would expect that the dollars would not be converted to treasury notes unless the bank saw a need to shore up its reserves.
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