The impact of the Japanese banking crisis on the intraday FX market in late

University of Tokyo for helpful comments. I also thank Masaki Uchida for excellent research assistance. The research support of the Grant-in-Aid for Young scientists (B 14730051) from Japan Society for the Promotion of Science is gratefully acknowledged. Using the tick-by-tick yen/dollar exchange rate, this paper examines exchange rate dynamics for the period of the 1997 Japanese banking cri-sis. By high-frequency methodology, GARCH estimation and variance-ratio tests, the existence of a structural break in the foreign exchange market at the onset of the crisis is detected. We show a reversed pattern in return volatility after the series of bankruptcies. From the microstruc-ture analysis, it is found that the change in exchange rate dynamics can be attributed to a change in strategic foreign exchange trade behavior. The result provides new insights into the trading activities of market makers at the onset of bank failures