Journal of the Japanese and International Economies
Effects of Japanese macroeconomic statistic announcements on the dollar/yen exchange rate: High-resolution picture
Introduction
Exchange rate is a variable that market participants, economists, and sometimes policymakers are very much interested in. Its dynamic behavior is hard to explain, not to mention hard to predict. Exchange rates are influenced by many news and events – not only economic but political – that become available every minute, if not second. Some news causes a sudden jump in the exchange rate level. These price changes could be temporary (noise) or persistent (jump to a new equilibrium). In either case, movements in prices tend to be, but not always, associated with increased transactions. What triggers the price change and a surge in transaction activities? The usual suspects of the important variables that cause jumps and volatility in prices and increase transactions are disclosures of changes in the economic fundamentals. Any unexpected component, that is a “surprise,” of economic announcements, either unscheduled or regularly scheduled, has been examined in many papers in the literature on the impact macro announcements on exchange rates.
Another strand of literature has examined why a particular time of the day tends to be characterized by a surge (or a drop) in transactions and volatility compared to other times of the day. One of the reasons for a surge of transactions is a concentration of new information arrivals that tends to occur at the beginning of the business hours of major markets. A possible existence of private information may cause a different trading responses by dealers, some of them informed and some uninformed, to the arrival of new information. Consequently, the trading between these two types of dealers may be intensified. Easley and O’Hara (1992) incorporated private information into a model. Another reason is the arrival of private information, such as large order flows from retail customers, which are modeled in Lyons’ (1997) hot potato hypothesis. A transmission of orders by large retail customers to a bank would generate multiplied transactions in the inter-bank market through a price discovery process.
The literature on high-frequency data of foreign exchange markets points at a distinct intra-day transactions pattern. Transaction volume and price volatility depend on the time of the day. This intra-daily patterns of foreign exchange markets have been investigated and established by Ito and Hashimoto, 2004, Ito and Hashimoto, 2006 using the EBS data.
Our paper examines the behavior of dollar/yen exchange rates in reaction to releases of major macroeconomic statistics in Japan. This paper uses high-frequency (1-s-slice) EBS trade-platform data from 2001 to 2005.1 The EBS represents the majority of inter-bank market of spot dollar/yen exchange rate. In particular, this paper examines how the dollar/yen exchange rate market digests information contained in the various macroeconomic statistics releases – to what extent transactions and prices react to the macroeconomic statistics news, how long the news effect lasts, which news has the most/least impact on the exchange rate, and whether there has been a shift in the types of news statistics that affect the exchange rate. In the analysis, the unexpected component of macroeconomic announcements, a “surprise,” is defined by the difference between the actual announced value and the average of predicted values by the market.
Two key contributions of our paper can be summarized as follows. First, since the data are from the actual trading platform, they are quite reliable even during very volatile periods. This advantage of the EBS data is well-known and exploited by Chaboud et al., 2004, Berger et al., 2005, Ito and Hashimoto, 2006, Ito and Hashimoto, 2008. The data used in our analysis include both transactable quotes and transaction (deal) prices at every second. Second, to our best knowledge, this is the first paper that analyzes effects of the Japanese macroeconomic announcements on the yen/dollar exchange rate with high frequency trading-platform exchange rate data.
Our findings are as follows. First, surprise components of several Japanese macro statistics announcements are found to have particularly large impact on the dollar/yen movements whereas others do not. Large impacts on dollar/yen returns were found in surprise components of Tankan (Bank of Japan, business survey), production indices (GDP advance, industrial production), unemployment, PPI, CPI (Tokyo area), and balance of payment announcements. On the other hand, CPI, trade balance, diffusion (Keiki) indices, retail sales, housing construction, and money supply indicators are found to have almost no impact on the exchange rate and nonfarm payroll shows mixed results. Only a few macroeconomic announcements had significant effects – this result is in contrast to findings in the literature that examines the effect of US news releases on exchange rates. However, this result is in line with Ehrmann and Fratzscher (2004) who find that US macroeconomic statistical releases have relatively greater impact on exchange rates than the German news announcements.2
Large impacts from GDP and Tankan announcements are easy to understand from a theoretical point of view and are also found in the existing studies in different markets. Price variables such as PPI and CPI (Tokyo area) are also consistent with international finance theory. In contrast, CPI (national) did not impact the exchange rate. This is likely due to the fact that most of the information was contained in the CPI (Tokyo area), which is disclosed 1 month earlier than CPI (national). Money supply statistics also did not affect returns. The reason that money supply news announcement turned out to be almost irrelevant may come from the particular monetary policy in Japan – zero interest rate policy with quantitative easing – which was practiced during the sample years. Current account (balance of payments) statistics releases are found to have significant impact on returns, while trade balance statistics did not, because current account includes interest income and accrued dividends and so is more closely related to financial flows.
The rest of the paper is organized as follows. Section 2 gives a brief literature review. Section 3 describes the Japanese macroeconomic news announcements used in this paper. Section 4 shows the impact of news surprise on returns. Section 5 summarizes estimation results of surprises on volatility. Section 5.3 shows the surprise impact on the number of transactions and reveals differences of intra-day patterns of transaction volume between news-announcement days and no-news days. Section 6 concludes the paper.
Section snippets
Literature review
Intra-day activities such as the number of deals and transaction volume in foreign exchange markets are examined by Chaboud et al., 2004, Berger et al., 2005, and Ito and Hashimoto, 2004, Ito and Hashimoto, 2006.
Japanese macroeconomic announcements
In contrast to US macroeconomic announcements, most of which occur at 8:30am (EST), the release time of Japanese news announcements varies from news to news. As summarized in Table 1, in Japan some macroeconomic announcements are released in the afternoon. Most of the major macroeconomic statistics come out at either 8:30am, 8:50am, 10:30am, 2:00 pm, or 2:30 pm.
After 2001, the announcement time for Japanese macroeconomic statistics has become fairly standardized. Until 2000, however, a lot of
Impact of surprises on returns
In this section, we examine to what extent the dollar/yen return is impacted by an unexpected component (surprise) of macroeconomic news announcements. When an announcement of macro fundamental variable has non-zero unexpected content, the announcement should be followed by a change in the exchange rate, because investors and market participants should react to the surprise by rebalancing their portfolio positions, moving the exchange rate to a new equilibrium. If there is no surprise (expected =
Theoretical predictions
Theory predicts that only surprise components of the news releases affect the returns, and news without a surprise component should not have a significant effect. However, this is not the case with respect to the impact on volatility and the number of deals.
If a surprise in some news has significant impact on the returns, it should also significantly affect volatility, since volatility is the sum of the accumulated absolute changes. The size of volatility is determined by how the exchange rate
Conclusion
In this paper, reactions of the dollar–yen exchange rate, deal activities, and realized volatility following the macroeconomic news announcement were examined. Returns, transactions, and volatility around the announcement time were regressed with daily data with the announcement time only. The returns were regressed on the surprise component of the macro announcement, while both the number of deals and volatility were regressed on the absolute value of news surprise and the announcement dummy
Acknowledgments
We are grateful to Robert Feldman for the data of macro news announcements and market expectations prior to announcements. We thank Alain Chaboud, Clara Vega, Linda Goldberg, Gian Maria Milesi-Ferretti, Ken Singleton, and conference and seminar participants at the 2009 Annual AEA/ASSA Meeting, Applications of Physics in Financial Analysis 7th International Conference, the European Central Bank, Kobe University, and the International Monetary Fund for comments and suggestions. The following
References (28)
- et al.
Intraday periodicity and volatility persistence in financial markets
Journal of Empirical Finance
(1997) - et al.
Periodic market closure and trading volume: a model of intraday bids and asks
Journal of Economic Dynamics and Control
(1992) - et al.
Informational integration and FX trading
Journal of International Money and Finance
(2002) - et al.
Microstructural dynamics in a foreign exchange electronic broking system
Journal of International Money and Finance
(1996) - et al.
Intra-day seasonality in activities of the foreign exchange markets: evidence from the electronic broking system
Journal of the Japanese and International Economies
(2006) - et al.
News from the US and Japan: which moves the yen/dollar exchange rate?
Journal of Monetary Economics
(1987) - et al.
A theory of intraday patterns: volume and price variability
Review of Financial Studies
(1988) - et al.
Deutsche mark-dollar volatility: intraday activity patterns, macroeconomic announcements, and longer run dependencies
Journal of Finance
(1998) - et al.
Micro effects of macro announcements: real-time price discovery in foreign exchange
American Economic Review
(2003) - Andersen, Torben G., Bollerslev, Tim, Diebold, Francis X., Vega, Clara, 2005. Real-time price discovery in stock, bond...
Intra-day and inter-market volatility in foreign exchange rates
Review of Economic Studies
Time and the process of security price adjustment
Journal of Finance
Cited by (25)
The impact of Bank of Japan's exchange-traded fund purchases
2023, Journal of Financial StabilityPrice discovery and liquidity recovery: Forex market reactions to macro announcements
2022, Journal of International Money and FinanceThe interrelationship between order flow, exchange rate, and the role of American economic news
2021, North American Journal of Economics and FinanceCitation Excerpt :They found that the market volatility response to most economics news is stronger in expansions. It is worth noting that, in many relevant surveys, both theoretical and empirical, all publications agree that the economic news of the United States has influenced the foreign prices of most traded currencies, including the EUR, GBP, and JPY (Andersen & Bollerslev, 1998; Ayadi, Ben Omrane, Wang, & Welch, 2020; Cai, Cheung, Lee, & Melvin, 2001; Fatum, Hutchison, & Wu, 2012; Hashimoto & Ito, 2010; Laakkonen, 2004; Tanner, 1997). Moreover, these papers have come to a common conclusion: the economic news of each currency drives a jump in the level of the related exchange rate and boosts the volatility of returns from an hour to two hours after the economic news is released.
The role of carry trades on the effectiveness of Japan's quantitative easing
2020, International EconomicsCitation Excerpt :Second, Fang and Miller (2007) acknowledged that the expectation channel is reduced when investors grant too much importance to risk on the exchange rate market. Andersen et al. (2003), Watanabe and Yabu (2013), and Hashimoto and Ito (2010) have all shown that QE announcements and macroeconomic surprises have an impact on the JPY exchange rate. As a matter of fact, the Japanese Yen depreciates more in the presence of carry trades.
The exchange rate effects of macro news after the global Financial Crisis
2019, Journal of International Money and FinanceMacroeconomic announcements and price discovery in the foreign exchange market
2017, Journal of International Money and FinanceCitation Excerpt :We also find that the influence of U.S. macroeconomic announcements than those of European and Japanese announcements, consistent with Andersen et al. (2003), Ehrmann and Fratzscher (2004) and Hashimoto and Ito (2010).