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To: paul ross who wrote (13335)	6/17/1998 2:59:00 PM
From: Henry Volquardsen	Respond to of 116932

Hi Paul, Central banks sterilize intervention as part of their normal money market operations. When, as today, the Fed buys yen they are also selling dollars to the commercial banking system. This is effectively the same as injecting liquidity into the system. If the Fed does nothing about this extra liquidity it will cause interest rates to decline somewhat and could have an inflationary impact. If the Fed does not want to inject reserves into the system they will 'sterilize' it by draining liquidity from the banks. The Bank of Japan has the opposite concern of the Fed because the intervention has taken yen out of the market and put it into the Fed's account. This would contract Japanese bank lending which is the last think they want. So they will also sterilize by injecting additional reserves. Foreign exchange intervention often goes counter what a central bank is trying to accomplish in it money market operations and winds up getting sterilized. This is part of the reason intervention rarely has a long term impact and is more of a holding action. By depreciate the yen I simply meant allowing the market to move to an equilibrium level, which is what it was doing on its own. I haven't seen any speculation that increasing the yen money supply would increase the yen's value (under any conditions) and frankly would consider such reasoning nonsensical. Henry