Traditionally, intervention in the forex market by a central bank does not sustainably move a currency since the huge capital flows that move through the forex market usually overwhelm any amount that a central bank can counteract them with.

As a result, such official action tends to have only a moderating or smoothing effect on the exchange rate in the near term, while the trend will usually ultimately reassert itself in the longer term.

Current Bout of Intervention Seen as More Effective Than Usual

With that historical background about intervention noted, the current round of intervention by the Bank of Japan may eventually prove to be more effective than would otherwise have been thought.

For a start, forex traders have observed that the BOJ has successfully initiated unsterilized intervention in a sizeable amount that has moved the market significantly. This was done unilaterally and without benefitting from the concerted effort of either the United States' or the European Union's central banks.

These facts alone tend to indicate that this particular bout of individual central bank intervention may eventually be more successful than the BOJ's previous thwarted attempt to stem strength in the Yen during 2004, for example.

Rumored Japanese Intervention Funds Impressive

Another important factor that can contribute to the BOJ's success this time around are the market estimates that the Japanese central bank has around $10 trillion worth of Yen stored up and waiting to sell as necessary to help weaken the Yen.

Japanese finance officials have also verbally assisted the BOJ in its intervention activities by drawing an invisible psychological support line at the 82.00 level for USD/JPY.

This somewhat arbitrary point comes in just below the rate's most recent 15 year low at the 82.87 level seen in mid September 2010 immediately before the initial bout of BOJ intervention took place.

The central bank's subsequent purchase of roughly $10 billion versus the Yen in the forex market, according to market estimates, then helped bring the rate sharply back up to the 85.92 level.

Intervention Fails to Reverse Strong Trend Favoring the Yen - Yet

Although this most recent intervention driven rally in USD/JPY still failed to reverse the pair's prevailing downtrend, it did bring the rate significantly higher to test a key downward sloping trend line that currently indicates significant resistance to rallies in USD/JPY.

If this down trend line ultimately breaks, a more sustained rally in the rate should then ensue that will most likely vindicate the BOJ's current Yen sales to help prop up USD/JPY.

Nevertheless, if that key line continues to hold, the BOJ will probably again need to show its face in the forex market to help keep the Yen from strengthening further.

Global Investors Seeking Security Boost Both Yen and Swiss Franc

The recent strength seen in the Japanese Yen has largely arisen from risk averse asset flows into Japanese investment markets.

Basically, because of persistent investor wariness about the U.S. Dollar's fortunes - due in part to the weak U.S. economy, as well as the record U.S. budget and trade deficits - global investors seeking security have primarily shifted assets out of U.S. Dollars and into the Japanese Yen, as well as the Swiss Franc.

Both of these currencies are now often perceived as relative safe havens in the increasingly risky global investment environment that has resulted from persistently weak economy in the United States that was led by the housing market downturn.

In addition, largely as a result of the recent sovereign debt crisis in Europe that was sparked off by Greece experiencing debt problems in early 2010, many investors have also been exiting Euro denominated assets.

The overall effect of this capital flow out of the Euro is that Yen and Swiss Franc based assets have tended to be the most common beneficiaries.

Such a flight to quality among international investors has resulted in considerable flows into both of these safe haven currencies since 2008.

The key question regarding the effectiveness of the recent BOJ intervention efforts therefore involves whether these massive capital flows into the Yen will be sustained in the face of clear disapproval of Yen strength on the part of the Bank of Japan.

If these flows do indeed persist, then the BOJ will most likely eventually have to step aside since even its apparently impressive efforts cannot turn the huge tide of international investor sentiment that currently dominates the forex market.

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.