Assessing Unconventional Monetary Policy in Japan Using Market Operation-based Monetary Policy Indices

Open market operations (MOs) were not originally designed for making monetary policy changes during normal times. However, they became an integral part of the unconventional monetary policy (UMP) when the policy rates hit the effective lower bound during the 2008 global financial crisis in the major advanced countries. This study quantifies the effect of UMP carried out by MO on the macroeconomy in Japan, from 2002 to 2019, based on four market operation-based monetary policy indices (MO-MPIs), namely a broadly-defined quantitative easing index and three liquidity supply indices targeting different financial market segments. Our results indicate that there were three distinctive regimes with different policy impacts: (1) before mid-2008, (2) mid-2008 – mid-2016, and (3) after mid-2016. Moreover, UMP carried out using MO was the most effective in the second regime, with very strong effects of all MO-MPIs on almost all macroeconomic variables. Furthermore, MO-MPIs became substantially less effective in the third regime (after mid-2016) after the Bank of Japan introduced yield curve control.