This paper tests the effectiveness of marginal reserve requirements employed by Japan in the 1970s to influence short‐term capital flows. We thereby contribute to the ongoing debate on the use of capital controls—market‐based ones in particular. While the case for using market‐based controls relies on the mixed evidence from the experience of Chile with unremunerated reserve requirements, testing for their effectiveness is hampered by the endogeneity of such a measure, which is typically imposed or intensified when inflows surge. We address this problem in the Japanese context by applying the method of propensity score matching, and find that an increase in marginal reserve requirements modestly reduced short‐term capital inflows through non‐resident free‐yen accounts. The impact was not statistically significant, however, implying that the price elasticity of short‐term capital flows was likely small. We conclude that market‐based controls must be nearly prohibitive, perhaps combined with administrative measures, to be effective in a meaningful way.