How is Policy Normalization by the Bank of Japan Affecting the Link between Monetary Policy and Stock Prices

In 2013 the Bank of Japan (BoJ) began multiplying the monetary base. In 2016 it fixed the uncollateralized overnight call rate at -0.1% and the 10-year Japanese government bond (JGB) rate in a narrow band around zero. In 2021 it allowed JGB rates to increase. In 2024 it began increasing target rates for the overnight call rate. This paper investigates how monetary policy impacts stock returns both during the ultra-low and negative interest rate era and as the BoJ began normalizing monetary policy. Using Krippner’s (2013) shadow monetary policy rate to measure monetary policy, the results indicate that expansionary monetary policy did little to raise stock returns before 2021. After August 2021, however, contractionary monetary policy lowered returns on many stocks.