Japan's monetary policy has had to be unconventional in order to address the economic conditions the country has faced. This column assesses the Bank of Japan's exchange-traded fund purchasing programme, which has been repeatedly expanded in recent years. The purchases have achieved some positive results, propping up stock prices but also increasing real output and inflation. But, given the increased risks the Bank faces as its purchases have grown, the time to unwind has come.
The Bank of Japan (BOJ) has the longest history of unconventional monetary policy. It started with the introduction of a zero interest rate policy (ZIRP) in February 1999 – if we count that as unconventional. In all the time since, Japan has remained in the realm of unconventional monetary policy except for two periods – from August 2000 through to March 2001, and from July 2006 through to December 2008 – during which the ZIRP was temporarily lifted. However, the processes of the BOJ's unconventional monetary policy have evolved. Specifically, it embarked upon 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.
The BOJ's long history of untraditional monetary policy has resulted in sufficient accumulation of data for quantitative analysis. As such, there are a growing number of studies assessing the effects of the BOJ's monetary policy choices. In this column, draw on my recent research findings along with those of other studies in focusing on purchases of exchange-traded funds (ETFs), one of a series of untraditional policy measures adopted by the BOJ, to discuss the effects of this scheme and its implications for the future.
The BOJ's purchases of ETFs
Upon launching the CME in October 2010, the BOJ introduced an asset purchase programme and, as part of this programme, the central bank began to purchase ETFs the following December. Initially, ETF purchasing operations were meant to be a temporary measure applicable through to the end of 2011 with the ceiling for ETF purchases outstanding fixed at ¥450 billion. 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. Then, in August 2011, the timeframe for ETF purchasing operations was extended again to the end of 2012 with the ceiling amount raised to ¥1.4 trillion. Furthermore, when the BOJ introduced QQE in April 2013, the framework for ETF purchases was expanded significantly, 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 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 again in September 2016.
Another core of QQE is quantitative easing and, as of January 2019, the BOJ was purchasing long-term Japanese government bonds in a flexible manner so that the amount held would increase at the pace of approximately ¥80 trillion per year. Compared to the annual amount of the BOJ's government bond purchase, that of ETF purchases is small, but ETFs have no maturity and involve much greater risk, for instance in terms of price volatility. The BOJ is the only central bank purchasing stocks through ETFs, which is one of the distinctive characteristics of its untraditional monetary policy.
Effects of the BOJ's ETF purchases on the macroeconomy and stock prices
Now, what effects have the BOJ's ETF purchases had on the macroeconomy and financial markets? For the QQE as a whole, Michaelis and Watzka (2017) and Hanish (2017) found pronounced effects on core prices but weak effects on output. In contrast, Miyao and Okimoto (2017) showed that purchases of risky assets such as ETFs have been impactful particularly on real output, although it was found that ETF purchases have had a limited impact on inflation.
Focusing on expected long-term inflation, in a recent paper (Okimoto 2019) I confirmed that the introduction of the 2% inflation target and QQE in 2013 significantly raised expected long-term inflation but it still remained below 1%. It was also shown that while the effects of the BOJ's ETF purchases on inflation have been very limited, the policy has been propping up expected long-term inflation, thus suggesting that ETF purchases have had positive effects on the real economy.
Barbon and Gianinazzi (2018) examined the asset pricing implications of the ETF purchasing programme on individual stocks' daily returns for the period from 2013 to 2016, showing that the BOJ's programme has a positive and persistent effect on individual stocks. Charoenwong et al. (2019) found that the BOJ's ETF purchasing programme has an immediate impact, increasing stock prices, but this effect is short-lived and has no permanent impact. Harada and Okimoto (2019) analysed the effects of the BOJ's ETF purchases on stock prices. 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 0.02% 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 analysing its effects. Research findings suggest the possibility that the BOJ's ETF purchases have had a relatively large positive impact on real output and helped to 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 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 important to take certain pre-emptive 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 a lot of 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 Bank 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 end its massive monetary easing, partly because the government's structural reform programmes 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 policy choices. 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.
This article first appeared on www.VoxEU.org on June 13, 2019. Reproduced with permission.