## _wp11264

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---

### I. Introduction and Objectives
- The Bank of Japan (BoJ) expanded its toolkit through a series of monetary easing measures since early-2009, including a fixed-rate funds-supplying operation, increased purchases of government securities, and a clearer policy commitment to the zero interest rate policy (Table 1).
- Overall objective: achieve sustainable growth and price stability amid high public debt, large fiscal deficits, and close-to-zero interest rates.
- Key innovation: introduction of a new asset purchase program under Comprehensive Monetary Easing (CME) in October (year as in source). Purchases include private sector financial assets—corporate bonds, commercial paper (CP), exchange-traded funds (ETFs) and real estate investment trusts (REITs)—in addition to government securities.
- Stated goals of CME asset purchases: encourage a decline in long-term interest rates and reduce the risk premium.

### II. Recent Conduct of Monetary Policy Measures (summary from Table 1)
- Outright purchases of government bonds: Dec-08; Current target scale ¥21.6 trillion per year; Actual bal. as of end-August 2011 ¥62.1 trillion.
- Fixed-rate funds-supplying operation against pooled collateral: Dec-09; Current target ¥35 trillion; Actual bal. as of end-August 2011 ¥31.2 trillion.
- Providing support to strengthen foundations for growth (fund provisioning): Apr-10; Target not exceeding ¥3 trillion; Actual bal. as of end-August 2011 ¥2.9 trillion.
- “Comprehensive Monetary Easing (CME)”: Oct-10; Virtually zero-interest rate policy guidance.
- Asset Purchase Program: Mar-11; Current target scale (as of Aug-11) ¥50 trillion; Actual bal. as of end-August 2011 ¥38.6 trillion.
- Notes: The size of asset purchase program was expanded by ¥5 trillion to ¥40 trillion on 14 March, of which ¥30 trillion is related to the fixed-rate funds supplying operations. The target size was further expanded in August 2011 to ¥50 trillion, of which ¥40 trillion on the fixed-rate funds supplying operations.
- Additional measures following the March 2011 earthquake: funds-supplying operation to support financial institutions in disaster area (March) and the new lending facility to support asset-based lending (June).

### III. Bank of Japan Asset Purchase Program — Current Status
- Reported totals (in billions of yen) — as presented in source:
  - Total purchases: 8913.11450.02400.0800.03900.0340.422.7
  - Total outstanding balance (end-July 2011): 6551.11305.12504.31580.3798.1340.622.7
  - New target: 1500040004500210029001390110
- BoJ doubled size of asset purchases to ¥10 trillion with plans to complete purchases by end-2012 (post-March earthquake). Later increased asset purchase program by ¥10 trillion to a total of ¥50 trillion; BoJ reached about half of the target level as of end-August, with plans to complete the purchases by end-2012.

### IV. Event Study Methodology
- Event study measures impact of monetary easing as change in asset returns and volatility across equity prices, sovereign and corporate bond yields, exchange rates, inflation expectations, and term premium.
- Two event windows used:
  - Two trading days: defined as t+1 vs t-1 where t refers to the event day.
  - Five trading days (one week): t+4 vs t-1.
- Data: daily closing prices or yields from Bloomberg; standard errors calculated using daily volatility of typical trading days from January 2005 to mid-2011.
- Events classified into: announcement of new policy, modification (expansion or extension) of current policies, actual purchases or operations, and exits of policies.
- Events considered: five events related to announcements of new programs and over 30 events of subsequent expansion or purchases or exits. (Two events on new operations in disaster areas and credit line for equity investment and asset-based lending excluded from analysis.)

### V. Impact on Financial Markets — Summary of Main Findings
- Overall assessment: BoJ’s monetary easing measures had a significant and broad-based impact on financial markets; impact stems mainly from announcements rather than subsequent operations or purchases.
- Government securities:
  - Sovereign yields across all maturities declined in three out of the five events at the 5 percent significance level.
  - Cumulative changes (two-trading day window): 10-year JGB fell by 24 basis points; 2-year JGB fell by 14 basis points; typical trading day change 0.1 basis point.
  - Initial falls in sovereign yields persisted and often reinforced in the following week.
- Corporate bonds:
  - Corporate yields across investment grades cumulatively decreased by 15–22 basis points in the two-day window (p-value around 0.05).
  - Impact remained broadly the same through the week.
  - Bond issuances improved following the asset purchase program.
- Equity markets:
  - Stock and futures markets strengthened in four out of five easing events, cumulatively increasing by 5–7 percent in the week after.
  - Impact statistically significant with p-value less than 0.05.
  - Implied volatility in equity markets generally declined following measures.
- REITs:
  - J-REIT prices surged cumulatively 14 percent following monetary easing events, reflecting large BoJ purchases in a relatively small market.
- Exchange rates and inflation expectations:
  - Yen exchange rates (spot and forward) changed little and were not significantly different from typical trading day movements.
  - Inflation expectations (breakeven rates from inflation-linked bonds) remained unchanged within event windows.
- Announcement vs purchases:
  - Most impact came from announcement of new measures rather than actual purchases under the asset purchase program.
  - Purchases of ETFs were often associated with a fall in equity prices during event windows, suggesting purchases were used to support asset prices.
  - Announcements to expand measures (size or duration) or exits from earlier easing had modest market impact.

### VI. Event-level Two-Day Window Results (selected numeric highlights)
- 19-Dec-08 (Outright purchase of government bonds and commercial papers):
  - short-term interest rate: -7.3
  - 1-year JGB: -7.7
  - 2-year JGB: -7.3
  - 10-year JGB: -2.6
  - Nikkei: 0.92 (percent)
  - J-REITs: 3.91 (percent)
- 01-Dec-09 (Enhancement of easy monetary conditions):
  - short-term interest rate: -4.3
  - 1-year JGB: -4.5
  - 2-year JGB: -5.8
  - 10-year JGB: -3.8
  - Nikkei: 3.22 (percent)
  - J-REITs: 5.74 (percent)
- 17-Mar-10 (Expansion of measures to encourage decline of long-term rate):
  - short-term interest rate: -0.1
  - 1-year JGB: 0.5
  - 2-year JGB: 2.7
  - 10-year JGB: 3.4
  - Nikkei: 0.19 (percent)
  - J-REITs: 1.19 (percent)
- 30-Aug-10 (Enhancement of easy monetary conditions):
  - short-term interest rate: -0.3
  - 1-year JGB: -1.5
  - 2-year JGB: -3.9
  - 10-year JGB: -3.5
  - Nikkei: -1.90 (percent)
  - J-REITs: 1.17 (percent)
- 05-Oct-10 (Comprehensive monetary easing):
  - short-term interest rate: -1.1
  - 1-year JGB: -0.9
  - 2-year JGB: -10
  - 10-year JGB: -5.4
  - 1-year future: 0 (percent)
  - 3-month futures: -0.40 (percent)
  - Nikkei: 3.74 (percent)
  - J-REITs: 2.25 (percent)
- Cumulative sum (two-day window, across the five announcement events):
  - short-term interest rate: -13.1
  - 1-year JGB: -14.1
  - 2-year JGB: -24.3
  - 10-year JGB: -11.9
  - 1-year future: -12.5
  - 3-month futures: -1.6
  - AA-rated corporate yields: -10.2 (basis points)
  - BBB-rated corporate yields: -0.03 (basis points)
  - Nikkei: 5.13 (percent)
  - Nikkei futures: 6.17 (percent)
  - Implied volatility: -9.00 (percent)
  - J-REITs: 14.26 (percent)
  - Statistical significance: many of these cumulative changes are reported as significant at the 5 percent level for several assets.

### VII. Interpretation and Implications
- Announcement effect dominates market response: investors priced-in expected impacts of subsequent operations or purchases.
- Asset purchases of private risky assets (ETFs, J-REITs) had pronounced effects on those markets and may be effective for further monetary easing, though ETF purchases sometimes coincided with equity price declines at purchase events.
- Easing measures eased financial conditions by lowering long-term interest rates and reducing downside tail risks; impact was broad-based and extended beyond assets directly purchased by the BoJ.

### VIII. Event-level Summary Statistics (Introduction / Expansion / Exits — two trading day window)
- Introduction of new measures / facilities — Reported impacts (selected values):
  - -13.1, -15.9, -21.8, -12.6, -11.5, -2.2, -5.9, -0.1, 1.3, 1.2, -0.2, -0.1, 6.0, 7.1, -14.2, 18.5
- Introduction — Statistical significance (p-values shown in parentheses in source, selection):
  - (0.00), (0.00), (0.00), (0.07), (0.00), (0.25), (0.19), (0.26), (0.18), (0.20), (0.00), (0.16), (0.03), (0.01), (0.00), (0.00)
- Expansion of selected easing measures — Reported impacts (selected values):
  - -1.8, -12.0, -1.4, -3.3, 4.0, 1.5, 10.6, 0.1, -4.9, -4.8, 0.0, -0.1, -0.4, -1.3, -4.5, 5.7
- Expansion — Statistical significance (p-values):
  - (0.44), (0.03), (0.47), (0.41), (0.09), (0.32), (0.15), (0.45), (0.03), (0.03), (0.48), (0.37), (0.49), (0.40), (0.17), (0.07)
- Exits of selected measures / facilities — Reported impacts (selected values):
  - 0.2, -2.7, -2.1, -2.8, 1.0, 0.1, 0.6, 0.0, -0.2, -0.2, 0.0, 0.0, 0.0, 0.4, -1.9, 4.1
- Exits — Statistical significance (p-values):
  - (0.39), (0.27), (0.38), (0.35), (0.28), (0.46), (0.48), (0.48), (0.49), (0.49), (0.49), (0.47), (0.48), (0.43), (0.25), (0.04)
- Control groups: Typical trading day (sample period Jan 2005 to Jun 2011; event window defined as values at day t+1 net of day t-1)
  - Mean values: -0.2, -0.2, -0.1, -0.1, -0.06, -0.04, 0.10, 0.01, -0.07, -0.06, 0.00, 0.00, -0.04, -0.03, -0.01, 0.00
  - Standard deviation: 1.31, 2.01, 3.46, 3.60, 1.17, 1.32, 3.31, 0.07, 0.80, 0.80, 0.03, 0.04, 1.47, 1.45, 1.61, 1.35

### IX. Weekly Window Results (selected event-level and cumulative)
- 19-Dec-08 — Outright purchase of government bonds and commercial papers (weekly impacts)
  - short-term interest rate: -15.7
  - Inflation expectation 5/: -13.3
  - 1-year JGB: -16
  - 2-year JGB: -4.8
  - 10-year JGB: -11.5
  - 1-year future: -0.40
  - 3-month futures 3/: -2.70
  - long-end: 1.35
  - 5-year breakeven: 1.30
  - Spot rate: -0.17
  - 3-month forward rates: -0.03
  - AA-rated: 1.82
  - BBB-rated: 2.10
  - Nikkei: -12.27
  - Nikkei futures: 2.84
  - p-values (selection): (0.00) (0.00) (0.00) (0.20) (0.00) (0.42) (0.27) (0.07) (0.08) (0.00) (0.32) (0.18) (0.19) (0.00) (0.04)
- 01-Dec-09 — Enhancement of easy monetary conditions (weekly impacts)
  - short-term interest rate: -4.9
  - Inflation expectation 5/: -6.7
  - 1-year JGB: -7.7
  - 2-year JGB: -5.8
  - 10-year JGB: -6.5
  - 1-year future: -3.40
  - 3-month futures 3/: -1.00
  - long-end: 0.92
  - 5-year breakeven: 0.90
  - Spot rate: -0.08
  - 3-month forward rates: 0.00
  - AA-rated: 2.41
  - BBB-rated: 2.56
  - Nikkei: -0.14
  - Nikkei futures: 3.37
  - p-values (selection): (0.03) (0.02) (0.07) (0.15) (0.02) (0.03) (0.41) (0.31) (0.14) (0.14) (0.04) (0.46) (0.12) (0.15) (0.49) (0.02)
- 17-Mar-10 — Expansion of measures to encourage decline of long-term rate (weekly impacts)
  - short-term interest rate: -0.6
  - Inflation expectation 5/: 0.9
  - 1-year JGB: 0.8
  - 2-year JGB: 2.5
  - 10-year JGB: -4
  - 1-year future: 1.00
  - 3-month futures 3/: -0.10
  - long-end: -0.20
  - 5-year breakeven: -0.21
  - Spot rate: 0.03
  - 3-month forward rates: 0.00
  - AA-rated: -0.07
  - BBB-rated: 0.09
  - Nikkei: -1.34
  - Nikkei futures: 2.14
  - p-values (selection): (0.47) (0.33) (0.41) (0.29) (0.11) (0.28) (0.49) (0.43) (0.46) (0.47) (0.20) (0.46) (0.47) (0.45) (0.28) (0.10)
- 30-Aug-10 — Enhancement of easy monetary conditions (weekly impacts)
  - short-term interest rate: -0.5
  - Inflation expectation 5/: -0.5
  - 1-year JGB: 4.9
  - 2-year JGB: 0.5
  - 10-year JGB: 0.5
  - 1-year future: -0.60
  - 3-month futures 3/: 5.40
  - long-end: -0.43
  - 5-year breakeven: -0.42
  - Spot rate: 0.07
  - 3-month forward rates: 0.05
  - AA-rated: -0.24
  - BBB-rated: -0.34
  - Nikkei: 0.85
  - Nikkei futures: 1.24
  - p-values (selection): (0.48) (0.49) (0.14) (0.43) (0.39) (0.38) (0.12) (0.43) (0.45) (0.46) (0.04) (0.15) (0.50) (0.48) (0.33) (0.21)
- 05-Oct-10 — Comprehensive monetary easing (weekly impacts)
  - short-term interest rate: -0.9
  - Inflation expectation 5/: -2.9
  - 1-year JGB: -9.3
  - 2-year JGB: -5.7
  - 10-year JGB: -0.5
  - 1-year future: -1.50
  - 3-month futures 3/: -6.40
  - long-end: -0.69
  - 5-year breakeven: -0.69
  - Spot rate: -0.08
  - 3-month forward rates: -0.09
  - AA-rated: 3.44
  - BBB-rated: 3.63
  - Nikkei: -3.06
  - Nikkei futures: 3.40
  - p-values (selection): (0.42) (0.20) (0.03) (0.15) (0.48) (0.21) (0.08) (0.93) (0.36) (0.36) (0.04) (0.06) (0.05) (0.08) (0.08) (0.02)
- Cumulative sum (weekly window):
  - short-term interest rate: -22.6
  - Inflation expectation 5/: -22.5
  - 1-year JGB: -27.3
  - 2-year JGB: -13.3
  - 10-year JGB: -22
  - 1-year future: -4.90
  - 3-month futures 3/: -4.80
  - short-end: -0.04
  - long-end: 0.95
  - 5-year breakeven: 0.89
  - Spot rate: -0.22
  - 3-month forward rates: -0.07
  - AA-rated: 7.35
  - BBB-rated: 8.05
  - Nikkei: -15.96
  - Nikkei futures: 12.99
  - p-values (selection): (0.00) (0.00) (0.01) (0.16) (0.00) (0.12) (0.31) (0.32) (0.16) (0.17) (0.02) (0.35) (0.05) (0.06) (0.00) (0.00)

### X. Impact on Asset Prices, Sectors, and Comparison with Fed
- BOJ’s easing measures had a statistically significant impact on bond yields and equity prices, but no notable effect on exchange rate and inflation expectation.
- Implied volatility based on option prices in the equity market fell cumulatively by nearly 10 percent (significant at 5 percent level) after the BoJ’s easing, indicating improved investor risk appetite.
- Sectoral effects:
  - Largest impact on financial and real estate sectors.
  - Megabanks and insurance companies had excess returns of over 10 percent during the week after the announcement of new easing measures.
  - Equity prices in other sectors did not show significant excess returns compared to the overall market.
- Comparison with U.S. Fed easing:
  - Both the United States and Japan saw asset price rises after easing announcements.
  - Differences: The Fed’s large-scale asset purchases generated stronger global spillovers and influenced dollar exchange rates and domestic inflation expectations; the BoJ’s measures did not show such global spillovers and had little effect on exchange rates or inflation expectations.

### XI. Risk Appetite, Tail Risks, and Confidence
- Implied volatility of Nikkei (VIX) and tail-risk measure based on skewness of implied volatility from out-of-money options fell after easing events.
- Markets’ perceived risk of a double-dip recession receded as indicated by declines in implied volatility of out-of-the-money call and put options.
- Business and consumer confidence generally improved following easing events.

### XII. Portfolio Rebalancing Framework and Potential Impact of Further Purchases
- Framework:
  - Uses portfolio rebalancing model following Neely (2010); investor maximizes expected net returns E(R) with covariance matrix W and risk aversion γ (calibrated around 0.9–1.1).
  - Covariance of asset returns estimated using daily data from 2000; portfolio weights measured using outstanding amounts or market capitalization from BOJ, Tokyo Stock Exchange, JSDA.
- Model implications:
  - Inclusion of private risky assets in the BOJ’s program is a key factor supporting asset prices.
    - Equity prices would have been 2–3 percent lower if the BOJ had not directly purchased ETFs and J-REITs.
    - Model predicts a sharper decline of sovereign yields than observed, possibly due to already-low interest rates in Japan.
  - Increased purchases of private assets could further support financial markets.
    - An additional purchase of ¥1 trillion of government securities beyond current target would have limited impact on sovereign yields and equity markets.
    - An additional ¥1 trillion purchase of corporate bonds and commercial paper would have a larger impact by lowering the risk premium in the corporate sector.
    - Purchasing additional ¥½ trillion equities-related assets would:
      - Reduce long-term sovereign yields by about 30 basis points.
      - Raise equity prices by 3 percent.
  - Portfolio rebalancing implies purchases of equity-related assets contributed to a fall of government bond yields via rebalancing effects.

### XIII. Quantitative Program Size, Market Shares, and Expected Impacts
- BOJ purchases and market sizes (selected figures and targets):
  - Asset purchase program (APP) under CME target and amounts (in trillion yen):
    - APP: 50 38.6 (entries as in source tables).
  - Target level 1/ (selected lines from source):
    - Government securities 2/5.0 3.0 850.0
    - Commercial paper 2.0 1.2 15.0
    - Corporate bonds 2.0 0.5 60.8
    - Exchange-traded funds 3/0.9 0.34 57.4
    - Real estate investment trusts 0.10 0.03 3.2
    - Subtotal 10.0 5.0
    - Fixed-rate fund-supplying operation against pooled collateral 30.0 29.6
    - Total 40.0 34.6
  - Note: Target level was raised from ¥35 to 40 trillion after the earthquake in mid-March 2011.
- Outstanding amount and target level (as of end-May 2011): less than ¥1½ trillion; would reach ¥5 trillion when target level is met; this would amount to about 3½ percent of the total balance sheet.
- Interpretation:
  - Purchases of private assets so far represent only a small amount relative to the size of the BoJ’s balance sheet.
  - Even if fully used, APP is small relative to total market shares, with the possible exception of J-REITs.
  - Expanding the asset purchase program is unlikely to crowd out private transactions given current relative sizes, but the same extent of impact from additional purchases is uncertain.

### XIV. Risks and Balance Sheet Considerations
- Large-scale purchases could raise credit risk on the BOJ’s balance sheet.
  - Excessive capital losses could undermine BOJ independence and credibility and potentially lead to distortive funds misallocation.
- Current assessment:
  - Anecdotal evidence suggests the risk to credibility or independence tends to be small, given the small fraction of target purchases relative to total market capitalization and liquidity.
  - The outstanding amount of risky assets held by the BOJ was less than ¥1½ trillion as of end-May and would reach ¥5 trillion at the target—about 3½ percent of the total balance sheet—indicating relatively modest balance-sheet risk so far.
- Caveat:
  - There remain risks to unconventional easing policies that could weaken their effectiveness.

### XV. Conclusion and Policy Implications
- Findings:
  - BoJ’s easing measures had a statistically significant impact on bond yields and equity prices, lowered downside tail risks, and helped support investor risk appetite.
  - Effects were mainly announcement-driven and broad-based across assets, though with only tentative signs of raising real activity.
- Policy considerations:
  - Further expansion of the asset purchase program, especially purchases of private assets (corporate bonds, commercial paper, ETFs, J-REITs), could materially support financial markets more than additional government bond purchases, given already-low government yields.
  - Policymakers should weigh potential gains in asset-price support against:
    - Credit risk to the central bank balance sheet.
    - Potential undermining of central bank independence and credibility in case of large capital losses.
    - Possible distortions to private market functioning if purchases become large relative to market size.
- Overall assessment:
  - Expanding purchases appears capable of supporting asset markets, but risks to BOJ balance sheet and independence, though currently modest, warrant careful consideration.

*Source: _wp11264 - References (source PDF content provided).*

### References .............................................................................................................

### _wp11264 - References .............................................................................................................

### I. Introduction and Objectives
- The Bank of Japan (BoJ) expanded its toolkit through a series of monetary easing measures since early-2009, including a fixed-rate funds-supplying operation, increased purchases of government securities, and a clearer policy commitment to the zero interest rate policy (Table 1).
- Overall objective: achieve sustainable growth and price stability amid high public debt, large fiscal deficits, and close-to-zero interest rates.
- Key innovation: introduction of a new asset purchase program under Comprehensive Monetary Easing (CME) in October (year as in source). Purchases include private sector financial assets—corporate bonds, commercial paper (CP), exchange-traded funds (ETFs) and real estate investment trusts (REITs)—in addition to government securities.
- Stated goals of CME asset purchases: encourage a decline in long-term interest rates and reduce the risk premium.

### II. Recent Conduct of Monetary Policy Measures (summary from Table 1)
- Outright purchases of government bonds: Dec-08; Current target scale ¥21.6 trillion per year; Actual bal. as of end-August 2011 ¥62.1 trillion.
- Fixed-rate funds-supplying operation against pooled collateral: Dec-09; Current target ¥35 trillion; Actual bal. as of end-August 2011 ¥31.2 trillion.
- Providing support to strengthen foundations for growth (fund provisioning): Apr-10; Target not exceeding ¥3 trillion; Actual bal. as of end-August 2011 ¥2.9 trillion.
- “Comprehensive Monetary Easing (CME)”: Oct-10; Virtually zero-interest rate policy guidance.
- Asset Purchase Program: Mar-11; Current target scale (as of Aug-11) ¥50 trillion; Actual bal. as of end-August 2011 ¥38.6 trillion.
- Notes: The size of asset purchase program was expanded by ¥5 trillion to ¥40 trillion on 14 March, of which ¥30 trillion is related to the fixed-rate funds supplying operations. The target size was further expanded in August 2011 to ¥50 trillion, of which ¥40 trillion on the fixed-rate funds supplying operations.
- Additional measures following the March 2011 earthquake: funds-supplying operation to support financial institutions in disaster area (March) and the new lending facility to support asset-based lending (June).

### III. Bank of Japan Asset Purchase Program — Current Status (figures and table summary)
- Bank of Japan Asset Purchase Program (In billions of yen) — reported totals:
  - Total purchases: 8913.11450.02400.0800.03900.0340.422.7
  - Total outstanding balance (end-July 2011): 6551.11305.12504.31580.3798.1340.622.7
  - New target: 1500040004500210029001390110
- BoJ doubled size of asset purchases to ¥10 trillion with plans to complete purchases by end-2012 (post-March earthquake). Later increased asset purchase program by ¥10 trillion to a total of ¥50 trillion; BoJ reached about half of the target level as of end-August, with plans to complete the purchases by end-2012.

### IV. Event Study Methodology (approach and event classification)
- Event study measures impact of monetary easing as change in asset returns and volatility across equity prices, sovereign and corporate bond yields, exchange rates, inflation expectations, and term premium.
- Two event windows used:
  - Two trading days: defined as t+1 vs t-1 where t refers to the event day.
  - Five trading days (one week): t+4 vs t-1.
- Data: daily closing prices or yields from Bloomberg; standard errors calculated using daily volatility of typical trading days from January 2005 to mid-2011.
- Events classified into: announcement of new policy, modification (expansion or extension) of current policies, actual purchases or operations, and exits of policies.
- Events considered: five events related to announcements of new programs and over 30 events of subsequent expansion or purchases or exits. (Two events on new operations in disaster areas and credit line for equity investment and asset-based lending excluded from analysis.)

### V. Impact on Financial Markets — Summary of Main Findings
- Overall assessment: BoJ’s monetary easing measures had a significant and broad-based impact on financial markets; impact stems mainly from announcements rather than subsequent operations or purchases.
- Government securities:
  - Sovereign yields across all maturities declined in three out of the five events at the 5 percent significance level.
  - Cumulative changes (two-trading day window): 10-year JGB fell by 24 basis points; 2-year JGB fell by 14 basis points; typical trading day change 0.1 basis point.
  - Initial falls in sovereign yields persisted and often reinforced in the following week.
- Corporate bonds:
  - Corporate yields across investment grades cumulatively decreased by 15–22 basis points in the two-day window (p-value around 0.05).
  - Impact remained broadly the same through the week.
  - Bond issuances improved following the asset purchase program.
- Equity markets:
  - Stock and futures markets strengthened in four out of five easing events, cumulatively increasing by 5–7 percent in the week after.
  - Impact statistically significant with p-value less than 0.05.
  - Implied volatility in equity markets generally declined following measures.
- REITs:
  - J-REIT prices surged cumulatively 14 percent following monetary easing events (Table 3a), reflecting large BoJ purchases in a relatively small market.
- Exchange rates and inflation expectations:
  - Yen exchange rates (spot and forward) changed little and were not significantly different from typical trading day movements.
  - Inflation expectations (breakeven rates from inflation-linked bonds) remained unchanged within event windows.
- Announcement vs purchases:
  - Most impact came from announcement of new measures rather than actual purchases under the asset purchase program.
  - Purchases of ETFs were often associated with a fall in equity prices during event windows, suggesting purchases were used to support asset prices.
  - Announcements to expand measures (size or duration) or exits from earlier easing had modest market impact.

### VI. Event-level Two-Day Window Results (selected numeric highlights from Table 3a)
- 19-Dec-08 (Outright purchase of government bonds and commercial papers):
  - short-term interest rate: -7.3
  - 1-year JGB: -7.7
  - 2-year JGB: -7.3
  - 10-year JGB: -2.6
  - Nikkei: 0.92 (percent)
  - J-REITs: 3.91 (percent)
- 01-Dec-09 (Enhancement of easy monetary conditions):
  - short-term interest rate: -4.3
  - 1-year JGB: -4.5
  - 2-year JGB: -5.8
  - 10-year JGB: -3.8
  - Nikkei: 3.22 (percent)
  - J-REITs: 5.74 (percent)
- 17-Mar-10 (Expansion of measures to encourage decline of long-term rate):
  - short-term interest rate: -0.1
  - 1-year JGB: 0.5
  - 2-year JGB: 2.7
  - 10-year JGB: 3.4
  - Nikkei: 0.19 (percent)
  - J-REITs: 1.19 (percent)
- 30-Aug-10 (Enhancement of easy monetary conditions):
  - short-term interest rate: -0.3
  - 1-year JGB: -1.5
  - 2-year JGB: -3.9
  - 10-year JGB: -3.5
  - Nikkei: -1.90 (percent)
  - J-REITs: 1.17 (percent)
- 05-Oct-10 (Comprehensive monetary easing):
  - short-term interest rate: -1.1
  - 1-year JGB: -0.9
  - 2-year JGB: -10 (basis points)
  - 10-year JGB: -5.4
  - 1-year future: 0 (percent)
  - 3-month futures: -0.40 (percent)
  - Nikkei: 3.74 (percent)
  - J-REITs: 2.25 (percent)
- Cumulative sum (two-day window, across the five announcement events):
  - short-term interest rate: -13.1
  - 1-year JGB: -14.1
  - 2-year JGB: -24.3
  - 10-year JGB: -11.9
  - 1-year future: -12.5
  - 3-month futures: -1.6
  - AA-rated corporate yields: -10.2 (basis points)
  - BBB-rated corporate yields: -0.03 (basis points)
  - Nikkei: 5.13 (percent)
  - Nikkei futures: 6.17 (percent)
  - Implied volatility: -9.00 (percent)
  - J-REITs: 14.26 (percent)
  - Statistical significance: many of these cumulative changes are reported as significant at the 5 percent level for several assets.

### VII. Interpretation and Implications (from paper)
- The announcement effect appears to dominate the market response, suggesting investors priced-in expected impacts of subsequent operations or purchases.
- Asset purchases, particularly of private risky assets (ETFs, J-REITs), had pronounced effects on those markets and may be effective for further monetary easing, though ETF purchases sometimes coincided with equity price declines at purchase events (consistent with support operations).
- The easing measures eased financial conditions by lowering long-term interest rates and reducing downside tail risks; impact was broad-based and extended beyond assets directly purchased by the BoJ.

*Source: _wp11264 - References (source PDF content provided).*

### Introduction of new measures / facilities

### Introduction of new measures / facilities

### Summary findings (event window: 2 trading days)
- Reported impacts (values correspond to columns in source table):
  - -13.1
  - -15.9
  - -21.8
  - -12.6
  - -11.5
  - -2.2
  - -5.9
  - -0.1
  - 1.3
  - 1.2
  - -0.2
  - -0.1
  - 6.0
  - 7.1
  - -14.2
  - 18.5
- Statistical significance (p-values relative to typical trading day control group, parentheses):
  - (0.00) (0.00)
  - (0.00)
  - (0.07)
  - (0.00)
  - (0.25)
  - (0.19)
  - (0.26)
  - (0.18)
  - (0.20)
  - (0.00)
  - (0.16)
  - (0.03)
  - (0.01)
  - (0.00)
  - (0.00)
- Note: "(see supp. Table for event classification)"; "various dates"

### Expansion of selected easing measures (event window: 2 trading days)
- Reported impacts:
  - -1.8
  - -12.0
  - -1.4
  - -3.3
  - 4.0
  - 1.5
  - 10.6
  - 0.1
  - -4.9
  - -4.8
  - 0.0
  - -0.1
  - -0.4
  - -1.3
  - -4.5
  - 5.7
- Statistical significance (p-values):
  - (0.44) (0.03)
  - (0.47)
  - (0.41)
  - (0.09)
  - (0.32)
  - (0.15)
  - (0.45)
  - (0.03)
  - (0.03)
  - (0.48)
  - (0.37)
  - (0.49)
  - (0.40)
  - (0.17)
  - (0.07)
- Note: "(see supp. Table for event classification)"; "various dates"

### Exits of selected measures / facilities (event window: 2 trading days)
- Reported impacts:
  - 0.2
  - -2.7
  - -2.1
  - -2.8
  - 1.0
  - 0.1
  - 0.6
  - 0.0
  - -0.2
  - -0.2
  - 0.0
  - 0.0
  - 0.0
  - 0.4
  - -1.9
  - 4.1
- Statistical significance (p-values):
  - (0.39) (0.27)
  - (0.38)
  - (0.35)
  - (0.28)
  - (0.46)
  - (0.48)
  - (0.48)
  - (0.49)
  - (0.49)
  - (0.49)
  - (0.47)
  - (0.48)
  - (0.43)
  - (0.25)
  - (0.04)
- Note: "(see supp. Table for event classification)"; "various dates"

### Control groups: Typical trading day (sample period Jan 2005 to Jun 2011; event window defined as values at day t+1 net of day t-1)
- Mean values:
  - -0.2
  - -0.2
  - -0.1
  - -0.1
  - -0.06
  - -0.04
  - 0.10
  - 0.01
  - -0.07
  - -0.06
  - 0.00
  - 0.00
  - -0.04
  - -0.03
  - -0.01
  - 0.00
- Standard deviation:
  - 1.31
  - 2.01
  - 3.46
  - 3.60
  - 1.17
  - 1.32
  - 3.31
  - 0.07
  - 0.80
  - 0.80
  - 0.03
  - 0.04
  - 1.47
  - 1.45
  - 1.61
  - 1.35

### MPC releases (Jul 08-Dec 10) — MPC meeting releases exclude monetary easing announcements
- Mean values:
  - -0.5
  - -0.9
  - -1.1
  - -0.7
  - -0.34
  - -0.59
  - -0.21
  - 0.01
  - -0.12
  - -0.12
  - -0.01
  - 0.00
  - -0.89
  - -0.90
  - 1.41
  - -0.58
- Standard deviation:
  - 1.96
  - 3.24
  - 3.36
  - 4.65
  - 2.39
  - 2.37
  - 4.67
  - 0.08
  - 1.28
  - 1.31
  - 0.03
  - 0.05
  - 2.61
  - 2.74
  - 3.17
  - 3.06

### Notes on data and interpretation
- Source: Bank of Japan, Bloomberg, staff calculations.
- 1/ Sample period from Jan 2005 to Jun 2011. All changes refer to an event window of 2 trading days, defined as the values at day t+1 net of day t-1 where t denotes the day of event announcement.
- 2/ Parentheses indicate the p-values relative to typical trading day control group. Numbers in bold if beyond 5-percent (p-value<0.05) significant level.
- 3/ Constant maturity zero coupon bonds for 2-year and 10-year horizon.
- 4/ An increase (+) denotes yen depreciation; in percent.
- 5/ in percent.

---

### Table 3b. Impact of the Bank of Japan’s Monetary Easing Measures on Financial Markets (Weekly Window)
(in basis points, unless otherwise stated 1/ 2/)

### Event-level weekly impacts (selected dates)
- 19-Dec-08 — Outright purchase of government bonds and commercial papers
  - short-term interest rate: -15.7
  - Inflation expectation 5/: -13.3
  - 1-year JGB: -16
  - 2-year JGB: -4.8
  - 10-year JGB: -11.5
  - 1-year future: -0.40
  - 3-month futures 3/: -2.70
  - short-end: -
  - long-end: 1.35
  - 5-year breakeven: 1.30
  - Spot rate: -0.17
  - 3-month forward rates: -0.03
  - AA-rated: 1.82
  - BBB-rated: 2.10
  - Nikkei: -12.27
  - Nikkei futures: 2.84
  - p-values (parentheses): (0.00) (0.00) (0.00) (0.20) (0.00) (0.42) (0.27) - (0.07) (0.08) (0.00) (0.32) (0.18) (0.19) (0.00) (0.04)

- 01-Dec-09 — Enhancement of easy monetary conditions
  - short-term interest rate: -4.9
  - Inflation expectation 5/: -6.7
  - 1-year JGB: -7.7
  - 2-year JGB: -5.8
  - 10-year JGB: -6.5
  - 1-year future: -3.40
  - 3-month futures 3/: -1.00
  - short-end: -0.04
  - long-end: 0.92
  - 5-year breakeven: 0.90
  - Spot rate: -0.08
  - 3-month forward rates: 0.00
  - AA-rated: 2.41
  - BBB-rated: 2.56
  - Nikkei: -0.14
  - Nikkei futures: 3.37
  - p-values: (0.03) (0.02) (0.07) (0.15) (0.02) (0.03) (0.41) (0.31) (0.14) (0.14) (0.04) (0.46) (0.12) (0.15) (0.49) (0.02)

- 17-Mar-10 — Expansion of measures to encourage decline of long-term rate
  - short-term interest rate: -0.6
  - Inflation expectation 5/: 0.9
  - 1-year JGB: 0.8
  - 2-year JGB: 2.5
  - 10-year JGB: -4
  - 1-year future: 1.00
  - 3-month futures 3/: -0.10
  - short-end: 0.00
  - long-end: -0.20
  - 5-year breakeven: -0.21
  - Spot rate: 0.03
  - 3-month forward rates: 0.00
  - AA-rated: -0.07
  - BBB-rated: 0.09
  - Nikkei: -1.34
  - Nikkei futures: 2.14
  - p-values: (0.47) (0.33) (0.41) (0.29) (0.11) (0.28) (0.49) (0.43) (0.46) (0.47) (0.20) (0.46) (0.47) (0.45) (0.28) (0.10)

- 30-Aug-10 — Enhancement of easy monetary conditions
  - short-term interest rate: -0.5
  - Inflation expectation 5/: -0.5
  - 1-year JGB: 4.9
  - 2-year JGB: 0.5
  - 10-year JGB: 0.5
  - 1-year future: -0.60
  - 3-month futures 3/: 5.40
  - short-end: 0.00
  - long-end: -0.43
  - 5-year breakeven: -0.42
  - Spot rate: 0.07
  - 3-month forward rates: 0.05
  - AA-rated: -0.24
  - BBB-rated: -0.34
  - Nikkei: 0.85
  - Nikkei futures: 1.24
  - p-values: (0.48) (0.49) (0.14) (0.43) (0.39) (0.38) (0.12) (0.43) (0.45) (0.46) (0.04) (0.15) (0.50) (0.48) (0.33) (0.21)

- 05-Oct-10 — Comprehensive monetary easing
  - short-term interest rate: -0.9
  - Inflation expectation 5/: -2.9
  - 1-year JGB: -9.3
  - 2-year JGB: -5.7
  - 10-year JGB: -0.5
  - 1-year future: -1.50
  - 3-month futures 3/: -6.40
  - short-end: 0.01
  - long-end: -0.69
  - 5-year breakeven: -0.69
  - Spot rate: -0.08
  - 3-month forward rates: -0.09
  - AA-rated: 3.44
  - BBB-rated: 3.63
  - Nikkei: -3.06
  - Nikkei futures: 3.40
  - p-values: (0.42) (0.20) (0.03) (0.15) (0.48) (0.21) (0.08) (0.93) (0.36) (0.36) (0.04) (0.06) (0.05) (0.08) (0.08) (0.02)

### Cumulative sum (weekly window)
- short-term interest rate: -22.6
- Inflation expectation 5/: -22.5
- 1-year JGB: -27.3
- 2-year JGB: -13.3
- 10-year JGB: -22
- 1-year future: -4.90
- 3-month futures 3/: -4.80
- short-end: -0.04
- long-end: 0.95
- 5-year breakeven: 0.89
- Spot rate: -0.22
- 3-month forward rates: -0.07
- AA-rated: 7.35
- BBB-rated: 8.05
- Nikkei: -15.96
- Nikkei futures: 12.99
- p-values: (0.00) (0.00) (0.01) (0.16) (0.00) (0.12) (0.31) (0.32) (0.16) (0.17) (0.02) (0.35) (0.05) (0.06) (0.00) (0.00)

*Source: Bank of Japan, Bloomberg, staff calculations.*

### Introduction of new measures / facilities

### Introduction of new measures / facilities

### Impact on asset prices and markets
- BOJ’s easing measures had a statistically significant impact on bond yields and equity prices, but no notable effect on exchange rate and inflation expectation.
- Asset prices responded strongly in Japan following announcements, though the magnitude fell short of the Fed’s and ECB’s quantitative easing measures.
- Implied volatility based on option prices in the equity market fell cumulatively by nearly 10 percent (significant at 5 percent level) after the BoJ’s easing, indicating improved investor risk appetite.
- The easing measures contributed to a decline in long-term interest rates and lowered downside tail risks; impact stemmed mainly from the announcement effect rather than actual operations or purchases.

### Cross-sectional and sectoral effects
- Across sectors, the BOJ’s measures had the largest impact on the financial and real estate sectors.
- Stock prices of the financial sector, notably the major banks and insurance companies, rose strongly relative to the market index (adjusted by industry beta).
  - Megabanks and insurance companies had excess returns of over 10 percent during the week after the announcement of new easing measures.
- Equity prices in other sectors did not show significant excess returns compared to the overall market, regardless of company size or credit status.

### Comparison with U.S. Fed easing measures
- Similarities:
  - Asset prices rose in both the United States and Japan following easing announcements.
- Two notable exceptions:
  1. The Fed’s large-scale asset purchases generated stronger global spillovers (including to Japan and the euro-area) than the BoJ’s measures, which showed no such global spillovers.
  2. The Fed’s easing influenced the dollar exchange rates and domestic inflation expectations, while the BoJ’s measures appeared to have no such effect.
- Cumulative impact examples (across various announcement dates, United States vs Japan):
  - United States: short-term interest rate cumulative sum -27.0; 1-year Treasury -45.8; 10-year Treasury -105.5; expected inflation -79.04; implied volatility and other metrics listed in Table 4.
  - Japan: short-term interest rate cumulative sum -6.7; 1-year Treasury -13.0; 10-year Treasury -12.3; long-end -15.6; exchange rate and other metrics listed in Table 4.
- Control group (typical trading day) standard deviations and means provided for context (United States, Japan, Euro-area or Germany).

### Risk appetite, tail risks, and confidence
- Implied volatility and tail-risk measures:
  - Implied volatility of Nikkei (VIX) and tail-risk measure based on skewness of implied volatility from out-of-money options fell after easing events.
  - Markets’ perceived risk of a double-dip recession receded as indicated by declines in implied volatility of out-of-the-money call and put options.
- Business and consumer confidence generally improved following easing events (Figure 3).
- These effects likely contributed to stabilizing Japan’s economy and narrowing perceived distribution of risks.

### Potential impact of further asset purchases (portfolio rebalancing framework)
- Framework:
  - Uses portfolio rebalancing model following Neely (2010); investor maximizes expected net returns E(R) with covariance matrix W and risk aversion γ (calibrated around 0.9–1.1).
  - Covariance of asset returns estimated using daily data from 2000; portfolio weights measured using outstanding amounts or market capitalization from BOJ, Tokyo Stock Exchange, JSDA.
- Model implications:
  - Inclusion of private risky assets in the BOJ’s program is a key factor supporting asset prices.
    - Equity prices would have been 2–3 percent lower if the BOJ had not directly purchased ETFs and J-REITs (Table 5—last column).
    - Model predicts a sharper decline of sovereign yields than observed, possibly due to already-low interest rates in Japan.
  - Increased purchases of private assets could further support financial markets.
    - An additional purchase of ¥1 trillion of government securities beyond current target would have limited impact on sovereign yields and equity markets.
    - An additional ¥1 trillion purchase of corporate bonds and commercial paper would have a larger impact by lowering the risk premium in the corporate sector.
    - Purchasing additional ¥½ trillion equities-related assets would:
      - Reduce long-term sovereign yields by about 30 basis points.
      - Raise equity prices by 3 percent.
  - Portfolio rebalancing implies purchases of equity-related assets contributed to a fall of government bond yields via rebalancing effects.

### Quantitative program size, market shares, and expected impacts
- BOJ purchases and market sizes (selected figures):
  - Asset purchase program (APP) under CME target and amounts (in trillion yen):
    - Government bonds: target 2/21.8 per year; as of August 2011 total 62.17; predicted expected changes in yields reported by maturity buckets.
    - Treasury bills: 3/21.4 148 (listed in table format in source).
    - Asset purchase program (APP) under CME: 50 38.6 (table entries).
    - Government bonds under APP: 41.6 732 -2 to -4 (expected change on yields or returns noted).
    - Treasury bills: 4.5 2.73 1-- (table entries).
    - Commercial papers: 2.1 1.6 -- (table entries).
    - Corporate bonds: 2.9 1.0 --23 to -29 (expected change on yields).
    - ETFs: 1.4 0.5 -328 to 401 125 to 153 (expected changes).
    - J-REITs: 0.1 0.04 35 to 65 4192 to 234 (expected changes).
- Outstanding amount and target level (in trillions of yen; Table 6 and text):
  - Amount outstanding (as of end-May 2011): less than ¥1½ trillion; would reach ¥5 trillion when target level is met.
  - This would amount to about 3½ percent of the total balance sheet.
  - Target level (asset purchases subtotal and totals; Table 6):
    - Target level 1/:
      - Government securities 2/5.0 3.0 850.0
      - Commercial paper 2.0 1.2 15.0
      - Corporate bonds 2.0 0.5 60.8
      - Exchange-traded funds 3/0.9 0.34 57.4
      - Real estate investment trusts 0.10 0.03 3.2
      - Subtotal 10.0 5.0
      - Fixed-rate fund-supplying operation against pooled collateral 30.0 29.6
      - Total 40.0 34.6
    - Note: Target level was raised from ¥35 to 40 trillion after the earthquake in mid-March 2011.
- Interpretation:
  - The purchases of private assets so far represent only a small amount relative to the size of the BoJ’s balance sheet.
  - Even if fully used, APP is small relative to total market shares, with the possible exception of J-REITs.
  - Expanding the asset purchase program is unlikely to crowd out private transactions in financial markets given current relative sizes, but the same extent of impact from additional purchases is uncertain.

### Risks and balance sheet considerations
- Large-scale purchases could raise credit risk on the BOJ’s balance sheet.
  - Excessive capital losses could undermine BOJ independence and credibility and potentially lead to distortive funds misallocation.
- Current assessment:
  - Anecdotal evidence suggests the risk to credibility or independence tends to be small, given the small fraction of target purchases relative to total market capitalization and liquidity.
  - The outstanding amount of risky assets held by the BOJ was less than ¥1½ trillion as of end-May and would reach ¥5 trillion at the target—about 3½ percent of the total balance sheet—indicating relatively modest balance-sheet risk so far.
- Caveat:
  - There remain risks to unconventional easing policies that could weaken their effectiveness (as discussed in Fujita, Ishi, and Stone (2011)).

### Conclusion and policy implications
- Findings:
  - BoJ’s easing measures had a statistically significant impact on bond yields and equity prices, lowered downside tail risks, and helped support investor risk appetite.
  - Effects were mainly announcement-driven and broad-based across assets, though with only tentative signs of raising real activity.
- Policy considerations:
  - Further expansion of the asset purchase program, especially purchases of private assets (corporate bonds, commercial paper, ETFs, J-REITs), could materially support financial markets more than additional government bond purchases, given already-low government yields.
  - Policymakers should weigh potential gains in asset-price support against:
    - Credit risk to the central bank balance sheet.
    - Potential undermining of central bank independence and credibility in case of large capital losses.
    - Possible distortions to private market functioning if purchases become large relative to market size.
- Overall assessment:
  - Expanding purchases appears capable of supporting asset markets, but risks to BOJ balance sheet and independence, though currently modest, warrant careful consideration.

*Source: Bank of Japan, Bloomberg, staff calculations; material excerpted from IMF chapter “Introduction of new measures / facilities.”*

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