The Bank of Japan (BOJ)'s unconventional monetary policy has a long history. It started with the introduction of zero-interest rate policy (ZIRP) in February 1999, if we count it as part of the unconventional monetary policy. For all those years since then, Japan has remained in the realm of unconventional monetary policy, except for two periods—from August 2000 through March 2001 and from July 2006 through December 2008—during which the ZIRP was temporarily lifted. Meanwhile, the processes of the BOJ's unconventional monetary policy have evolved. Specifically, the BOJ embarked on quantitative easing (QE) in March 2001, followed by the launch of comprehensive monetary easing (CME) in October 2010, quantitative and qualitative monetary easing (QQE) in April 2013, QQE with a negative interest rate in January 2016, and QQE with yield curve control in September 2016, all to enhance monetary easing effects.
As mentioned above, the history of the BOJ's untraditional monetary policy is quite long—that is, longer than that of any other country—resulting in a sufficient accumulation of data for quantitative analysis. As such, assessing the effects of the BOJ's untraditional monetary policy has been one of my research themes in the past several years. In this article, I would like to draw on recent research findings in focusing on purchases of exchange-traded funds (ETFs), one of a series of untraditional monetary policy measures adopted by the BOJ, to discuss the effects of this scheme and its implications for the future.
BOJ's purchases of ETFs
Upon launching the CME in October 2010, the BOJ introduced an asset purchase program and, as part of this program, the central bank began to purchase ETFs in December 2010. Initially, ETF purchasing operations were meant to be a temporary measure applicable through the end of 2011 with the ceiling for ETF purchases outstanding fixed at 450 billion yen. However, in March 2011, the BOJ extended the temporary period to the end of June 2012 and raised the ceiling for ETF purchases outstanding to 900 billion yen. Then, in August 2011, the time frame for ETF purchasing operations was extended again to the end of 2012 with the ceiling amount raised to 1.4 trillion yen. Furthermore, when the BOJ introduced QQE in April 2013, the framework for ETF purchases was expanded significantly as part of qualitative easing, eliminating the time frame and pledging to purchase one trillion yen of ETFs per year. And that was not the end, as the BOJ tripled the annual amount of ETF purchases to three trillion yen in October 2014 and expanded the scope of ETFs eligible for its purchases to include those tracking the JPX-Nikkei 400 index in November 2014. From July 2016 onward, the annual amount of ETF purchases has been set at six trillion yen with the composition of ETF purchases changed in September 2016.
Another core of QQE is quantitative easing and, as of January 2019, the BOJ was purchasing long-term Japanese government bonds (JGBs) in a flexible manner so that the amount of long-term JGBs held would increase at the pace of approximately 80 trillion yen per year. Compared to this amount, the annual amount of ETF purchases is small, but ETFs have no maturity and involve much greater risk, for instance, in terms of price volatility. That is why other central banks—whether the U.S. Federal Reserve or the European Central Bank (ECB)—are staying away from ETFs while purchasing various sorts of assets under their untraditional monetary policies. The BOJ is the only central bank purchasing stocks through ETFs, which is one of the distinctive characteristics of the BOJ's untraditional monetary policy.
Macroeconomic effects of the BOJ's ETF purchases
Now, what effects have the BOJ's ETF purchases had on the macroeconomy and financial markets? In an attempt to find the answer to this question, Miyao and Okimoto (2017) analyzed the macroeconomic effects of the BOJ's untraditional monetary policy including ETF purchases, using a structural vector auto regression (VAR) model that takes into account the macroeconomic effects of the regime shift It was found that the BOJ's untraditional monetary policy had statistically significant positive effects on real output and prices during periods in which the BOJ stepped up its monetary easing such as the introduction of QQE in recent years, and that those effects have had a long-lasting impact. Also, it was suggested that purchases of risk assets such as ETFs have been impactful particularly on real output, having roughly twice the impact of JGB purchases. At the same time, however, it was found that ETF purchases have had a limited impact on inflation. As mentioned above, ETF purchases involve relatively high risk and can be considered as one of the most aggressive monetary easing measures. While it is an interesting finding that more pronounced effects were observed for real output, it is also rather surprising that ETF purchases have hardly had any impact on inflation.
Based on those findings and using a hybrid Phillips curve that incorporates the regime shifts, Okimoto (2019) examined the regime dynamics of Japan's inflation rate and expected long-term inflation rate as to how they correspond to monetary policy regimes and the key factors driving their dynamics. The results of analysis show that Japan's expected long-term inflation rate regimes and monetary policy regimes are closely linked, with a significant rise in the expected long-term interest rate being observed following the introduction of the 2% inflation target and QQE in 2013. Even then, however, the expected long-term interest rate has remained below 1%, suggesting that there is still a significant gap to be bridged in order to achieve the 2% target. The findings also reveal that foreign exchange rates and crude oil prices have been major contributors to fluctuations in the inflation rate from 2013 onward, while the effects of stock prices have been very limited. Here, based on the assumption that the BOJ's ETF purchases have contributed to the rise in stock prices from 2013 onward, our conclusion would again be that ETF purchases have had only limited effects on inflation. However, Okimoto (2019) also examined the effects of stock prices on expected long-term inflation rate regimes, and the resulting findings show that stock prices are a significant factor contributing to a shift from one expected long-term inflation rate regime to another and that a surge in stock prices plays an important role in maintaining the positive expected long-term inflation rate regime from 2013 onward. In other words, interestingly, the findings point to the possibility that the BOJ's ETF purchases have been propping up the expected long-term inflation rate, thus suggesting that ETF purchases have had positive effects on the real economy and inflation through a rise in the expected long-term inflation rate.
Effects of the BOJ's ETF purchases on stock prices
The above discussion is premised on the assumption that the BOJ's ETF purchases have had a positive impact on stock prices. Although the primary purpose of ETF purchases is to drive down risk premiums, not to push up stock prices, it is quite conceivable that this scheme has been impacting stock prices because, in fact, the BOJ has been purchasing stocks through ETF purchases. In an attempt to elucidate this point, Harada and Okimoto (2019) analyzed the effects of the BOJ's ETF purchases on stock prices. Specifically, we focused on the BOJ's purchases of Nikkei 225 ETFs, decomposed daily returns on individual stocks—including those that are components of Nikkei 225 and those that are not—into morning and afternoon returns, and analyzed the difference between afternoon returns on Nikkei 225 stocks and those on non-Nikkei 225 stocks using a difference-in-differences (DID) methodology to quantitatively assess the effects of policy interventions on Nikkei 225 stocks. The results suggest that the BOJ's purchases of Nikkei 225 ETFs have a significant positive impact on afternoon returns on Nikkei 225 stocks, but the impact has been getting smaller. Nikkei 225 stock prices showed a tendency to rise 0.055% on average per 10 billion yen of Nikkei 225 ETFs purchased by the BOJ in the initial stage of QQE, but the impact was down to 0.020% in September 2016 and thereafter. Our findings also indicate that the cumulative effects of Nikkei 225 ETF purchases as of October 2017 translate into an approximately 20% increase in Nikkei 225 stock prices. We need to allow for a margin of error in reading these figures as would be the case for any estimates. Still, the finding that the BOJ's ETF purchases have contributed considerably to the rise in stock prices following the introduction of QQE has significant implications.
With more than five years since the launch of QQE in April 2013, we are now seeing an increasing number of studies quantitatively analyzing the effects of QQE. I have a keen interest in quantifying the effects of QQE, and what I have discussed in this article is based on my recent research in which I analyzed the effects of the BOJ's ETF purchases. Research findings suggest the possibility that the BOJ's ETF purchases have had a relatively large positive impact on real output and helped push up the expected inflation rate through soaring stock prices. In other words, we can conclude that the BOJ's ETF purchases have achieved some positive results, having contributed significantly not only to propping up stock prices but also to increasing real output and inflation. However, it seems that ETF purchases are now beginning to show signs of losing steam, as the research findings also suggest that they have become less impactful in recent years at least vis-à-vis stock prices. Meanwhile, as the BOJ has continued to purchase ETFs over the course of those years, unit prices at which they were bought have risen, elevating the level of the Nikkei 225 stock average, by which the BOJ would incur a latent loss on its ETF holdings. That is, the BOJ is facing the increasing risk of incurring losses, making it all the more imperative to take certain preemptive measures. Furthermore, with its stockholdings through ETFs accounting for nearly 5% of the aggregate market value of stocks traded on the first section of the Tokyo Stock Exchange, the BOJ has now become the top shareholder of many Japanese companies, prompting many to voice concerns about adverse side effects, for instance, from the viewpoint of ensuring the efficacy of stock pricing as well as corporate governance. Thus, it is a matter of certainty that the time is imminent for the BOJ to start unwinding its ETF holdings. Indeed, the BOJ is already eyeing the possibility of tapering its ETF purchases as it said in its monetary policy statement in July 2018 that the amount of ETF purchases could increase or decrease depending on market conditions. As it turned out, however, the BOJ's ETF purchases in 2018 amounted to a record 6.504 trillion yen against the backdrop of the global stock market slump that began in October 2018, providing a reminder of just how difficult it can be to scale down the operation. The BOJ has been unable to achieve its 2% inflation target and hence to end its massive monetary easing partly because the government's structural reform programs and their effects have been slow to appear. Stagnation in the global economy has also been a factor. Thus, we cannot put all the blame on monetary policies. However, it is the BOJ's mission to implement sustainable monetary policies by properly managing such risks, and I do hope that it will continue to ensure proper policy management.
March 6, 2019