What happens if a country decides to buy foreign currency

What happens if a country decides to buy foreign currency

Another interesting question coming from our FB page.

And it is about countries' currency rates, exchange, and prices.
“What happens if a country decides to intervene in its currency market? What if it decides to buy foreign currency? For example,  years ago Japan decided to stop the appreciation of the Yen. They started buying foreign reserves. As a result – that depreciated the Yen – their local currency.

And the answer is simply because:
-  When the Japanese central bank started buying foreign reserves, they added more Japanese Yen into the market.
-  More supply of JPY then drove the Yen to depreciate against other currencies.
-  On the other side, if Japan's central bank starts selling foreign reserves, they will withdraw JPY out of the market. JPY supply will be reduced, it will then drive the Yen to appreciate against other currencies.

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