The Bank of Japan’s equity exchange-traded funds purchasing operation and its impact on equity returns

Abstract

The Bank of Japan (BoJ) conducts an unconventional monetary policy that includes exchange-traded fund (ETF) purchases, which can be expected to affect aggregate equity indices. As equity ETF purchases represent a unique and exceptional monetary policy framework, there are few studies on how such purchases have affected the stock markets or the real economy. The motivation of this paper is therefore to reveal the effectiveness of the BoJ’s equity ETF purchases and contribute to the broad literature on unconventional monetary policy by providing new insights. Ordinary least squares regression analysis is conducted to examine the effects of the BoJ’s ETF purchases and determine whether they are predictable, the effect of expected versus unexpected purchases on aggregate equity indexes differs, and price effects are long lasting. Since the October 2014 increase in the annual volume of ETF purchases by the BoJ, such purchases have become less predictable. Expected purchases do not affect prices, whereas unexpected purchases have a significant, positive price impact. However, this impact is found to be temporary in nature.

Keywords:

• the Bank of Japan (BoJ)
• unconventional monetary policy
• exchange-traded funds (ETFs)
• quantitative easing (QE)
• quantitative and qualitative easing (QQE)

JEL Classification:

• E58
• G12
• G14.

Acknowledgements

I would like to thank Sumihiro Takeda, Yoshitaka Fukui, Taiju Kitano, Mikihiro Matsuoka, Mitsuru Morita, Masao Muraki, Masaaki Shirakawa, and Michael Spencer for their helpful comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. See https://www.federalreserve.gov/newsevents/pressreleases/monetary20081216b.htm.

2. See https://www.ecb.europa.eu/press/pr/date/2012/html/pr120705.en.html.

3. See https://www.ecb.europa.eu/press/pressconf/2013/html/is130704.en.html.

4. See https://www.ecb.europa.eu/press/pr/date/2014/html/pr140605.en.html.

5. See https://www.ecb.europa.eu/press/pressconf/2015/html/is150305.en.html.

6. See https://www.ecb.europa.eu/press/pressconf/2016/html/is160602.en.html.

7. See http://www.boj.or.jp/en/announcements/release_2001/k010319a.html.

8. See http://www.boj.or.jp/en/announcements/release_2010/k101005.pdf.

9. See http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf.

10. See, for example, Gagnon et al. (2011), Joyce et al. (2011), Hancock and Passmore (2011), Hamilton and Wu (2012), Krishnamurthy and Vissing-Jorgensen (2012), D’Amico and King (2013), and Neely (2015).

11. The standard threshold is 50%; however, given the high predictability of my probit model, 50% tilts the sample size.

12. See http://www.boj.or.jp/en/announcements/release_2010/mok1011b.pdf.

Additional information

Funding

The author received no direct funding for this research.