Foreign exchange intervention when interest rates are zero: Does the portfolio balance channel matter after all?

•The paper provides an empirical investigation of intervention transmission channels.•The analysis focuses on Japanese interventions during the zero-interest rate period.•The paper tests hypotheses that evolve around market awareness of intervention.•The results suggest that intervention works through the portfolio-balance channel. This paper provides an empirical investigation of transmission channels of central bank foreign exchange intervention when interest rates are zero and traditional monetary policy options are constrained. The paper develops empirically testable hypotheses regarding the functioning of the intervention transmission channels under study. These hypotheses evolve around whether or not the market is aware or unaware of intervention. Official daily data on interventions in the JPY/USD market during the 1999 to 2004 Japanese zero-interest rate period facilitate the analysis. The results of the analysis are consistent with the suggestion that intervention when interest rates are zero works through the portfolio-balance channel.