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Asset price and monetary policy: The Japanese case

After the Bank of Japan (Japanese central bank) introduced unprecedented monetary policy in March 2011, it continuously conducted aggressive monetary policy to boost the economy. Moreover, it started to conduct stronger monetary policy in January 2013. It planned to double the monetary base to combat deflation and promote economic growth. The effectiveness of this large and unprecedented monetary base rule, which is not interest rate as used in traditional monetary policies targeted to boost the economy, has received much attention not only in Japan but also all over the world. This article empirically examines whether or not this monetary base rule would have achieved stock price rising in Japan. The results show no relationship between stock prices and monetary policy. The effect of monetary base expansion on Japanese stock prices was not found. Stock prices and exchange rates in the United States, on the other hand, have had significant effects on Japanese stock prices. | Journal of Applied Finance Banking vol. 5 no. 4 2015 1-9 ISSN 1792-6580 print version 1792-6599 online Scienpress Ltd 2015 Asset Price and Monetary Policy The Japanese Case Yutaka Kurihara1 Abstract After the Bank of Japan Japanese central bank introduced unprecedented monetary policy in March 2011 it continuously conducted aggressive monetary policy to boost the economy. Moreover it started to conduct stronger monetary policy in January 2013. It planned to double the monetary base to combat deflation and promote economic growth. The effectiveness of this large and unprecedented monetary base rule which is not interest rate as used in traditional monetary policies targeted to boost the economy has received much attention not only in Japan but also all over the world. This article empirically examines whether or not this monetary base rule would have achieved stock price rising in Japan. The results show no relationship between stock prices and monetary policy. The effect of monetary base expansion on Japanese stock prices was not found. Stock prices and exchange rates in the United States on the other hand have had significant effects on Japanese stock prices. JEL classification numbers E44 F52 G11 Keywords Bank of Japan monetary policy quantitative easing stock price 1 Introduction This article provides the results of an empirical investigation of the relationship between recent Japanese stock prices and macroeconomic variables namely monetary base and US stock prices. Japan experienced a period of unprecedented recession and deflation for more than 20 years. During that period the Bank of Japan BOJ Japanese central bank conducted monetary easing at an unprecedented level. One of the purposes of BOJ s policy was to influence stock price although the BOJ has not admitted to this purpose as have other central banks. The governor of the BOJ has reiterated the importance of increasing the transfer of funds from safe to so-called risky assets. The quantitative monetary