Many savvy forex traders have seen from their own experience gained from years trading in the forex market that central bank intervention aimed at supporting or weakening their nation's currency tends to be ineffective when it comes to reversing long term market trends.

Although rounds of forex market intervention certainly create short term bounces or even spikes that run counter trend, the underlying trend that initially prompted the intervention usually tends to subsequently reestablish itself once the central bank has moved aside.

Persistent Japanese Forex Market Intervention Policy

For example, the Bank of Japan acts as Japan's central bank and it has officially intervened against its own currency more than any other central bank.

This official activity in the currency market primarily arose because of prolonged Japanese Yen strength during the Japanese deflationary period seen during 1989 to2003 that had recently reasserted itself in 2010.

Such deflationary pressures combined with a strong currency tend to eventually price a country's products out of the market. This can adversely affect the country's exports and slow down their economic progress as a result.

This strong Yen situation still persists to some extent, as the Yen has recently made fresh fifteen year lows during the summer of 2010.

The Notable Lack of Success of Bank of Japan Intervention

Historically, the Bank of Japan last intervened in the forex market on March 16^th of 2004 when USDJPY was trading at 109.00 by selling 14.8 trillion Yen in Q1 of 2004. The BOJ had previously sold 20.4 trillion Yen during 2003.

In spite of this persistent and significant forex market intervention, USDJPY continued to fall during 2004, eventually ending the year lower at 102.63.

Prior to this, the BOJ was seen actively intervening in the forex market during the period from September 17^th, 2001 up until June 28^th, 2002. Even the U.S. Federal Reserve Bank stepped in to lend a hand to help bring down the strong Yen on September 27^th of 2001.

At the time of these interventions, the level of USDJPY was near 123.00. The central bank intervention persisted until June of 2002, without subsequent significant results in weakening the Yen.

Furthermore, the BOJ was seen selling Yen eighteen times during the period from January, 1999 until April, 2000. Even when aided by the Fed and the European Central Bank on one occasion, the BOJ failed to stem the market's strengthening of the Yen that eventually traded to the 102 level in April of 2000.

Even further back in 1995, the Japanese Yen traded to its major high as USDJPY fell to 79.75 on April 1^st of that year despite repeated central bank intervention by both the BOJ and the U.S. Fed.

Intervention Might Smooth a Trend but Rarely Reverses One

Basically, when central banks and government institutions intervene in the capital markets, they are up against the forces of the free market. As a result, they need to abide by the basic economic rules of supply and demand, just like all other forex traders.

Central banks that intervene in favor of their currency against another generally only postpone the inevitable. Accordingly, the situation usually ends up with the currency that is the subject of the intervention simply resuming its previous trend.

Professional traders seasoned in the currency markets sometimes even use intervention as an indication that the overall direction of the currency pair that prompted the intervention is correct.

They generally wait for the intervention to end before picking a spot to get in to trade against the central bank doing the intervening.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.