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Quantitative Easing and Liquidity in the Japanese Government Bond Market

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  • Kentaro Iwatsubo
  • Tomoki Taishi

Abstract

The “Quantitative and Qualitative Monetary Easing” enacted immediately after the inauguration of Bank of Japan Governor Kuroda brought violent fluctuations in the prices of government bonds and deteriorated market liquidity. Does a central bank's government bond purchasing policy generally reduce market liquidity? Do conditions exist that can prevent such a decrease? This study analyzes how the Bank of Japan's purchasing policy changes influenced market liquidity. The results reveal that three specific policy changes contributed significantly to improving market liquidity: (i) increased purchasing frequency; (ii) a decrease in the purchase amount per auction; and (iii) reduced variability in the purchase amounts. These policy changes facilitated investors' purchase schedule expectations and helped reduce market uncertainty. The evidence supports the theory that the effect of government bond purchasing policy on market liquidity depends on the market's informational environment.

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  • Kentaro Iwatsubo & Tomoki Taishi, 2018. "Quantitative Easing and Liquidity in the Japanese Government Bond Market," International Review of Finance, International Review of Finance Ltd., vol. 18(3), pages 463-475, September.
    • Handle: RePEc:bla:irvfin:v:18:y:2018:i:3:p:463-475
    DOI: 10.1111/irfi.12134
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    1. Mr. Fei Han & Dulani Seneviratne, 2018. "Scarcity Effects of Quantitative Easing on Market Liquidity: Evidence from the Japanese Government Bond Market," IMF Working Papers 2018/096, International Monetary Fund.
    2. Markus Heckel & Kiyohiko G. Nishimura, 2022. "Unconventional Monetary Policy through Open Market Operations: A Principal Component Analysis," Asian Economic Papers, MIT Press, vol. 21(1), pages 1-28, Winter/Sp.
    3. Lena Boneva & David Elliott & Iryna Kaminska & Oliver Linton & Nick McLaren & Ben Morley, 2022. "The Impact of Corporate QE on Liquidity: Evidence from the UK," The Economic Journal, Royal Economic Society, vol. 132(648), pages 2615-2643.
    4. Saumya Ranjan Dash & Debasish Maitra & Byomakesh Debata & Jitendra Mahakud, 2021. "Economic policy uncertainty and stock market liquidity: Evidence from G7 countries," International Review of Finance, International Review of Finance Ltd., vol. 21(2), pages 611-626, June.
    5. Boneva, Lena & Islami, Mevlud & Schlepper, Kathi, 2021. "Liquidity in the German corporate bond market: Has the CSPP made a difference?," Discussion Papers 08/2021, Deutsche Bundesbank.
    6. Noritaka Fukuma & Tomiyuki Kitamura & Kohei Maehashi & Naoki Matsuda & Keita Takemura & Kota Watanabe, 2024. "The Impact of Quantitative and Qualitative Easing and Yield Curve Control on the Functioning of the Japanese Government Bond Market," Bank of Japan Working Paper Series 24-E-9, Bank of Japan.
    7. Naoshi Tsuchida & Toshiaki Watanabe & Toshinao Yoshiba, 2016. "The Intraday Market Liquidity of Japanese Government Bond Futures," IMES Discussion Paper Series 16-E-07, Institute for Monetary and Economic Studies, Bank of Japan.
    8. Martijn Boermans & Viacheslav Keshkov, 2018. "The impact of the ECB asset purchases on the European bond market structure: Granular evidence on ownership concentration," DNB Working Papers 590, Netherlands Central Bank, Research Department.
    9. Stephen Anthony & Hamid Yahyaei, 2022. "Bringing Credibility Back to Macroeconomic Policy Frameworks," Economic Papers, The Economic Society of Australia, vol. 41(3), pages 276-295, September.
    10. Loriana Pelizzon & Marti G. Subrahmanyam & Reiko Tobe & Jun Uno, 2018. "Scarcity and Spotlight Effects on Liquidity and Yield: Quantitative Easing in Japan," IMES Discussion Paper Series 18-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
    11. Tiwari, Aviral Kumar & Abakah, Emmanuel Joel Aikins & Karikari, Nana Kwasi & Gil-Alana, Luis Alberiko, 2022. "The outbreak of COVID-19 and stock market liquidity: Evidence from emerging and developed equity markets," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    12. Toshiyuki Sakiyama & Tetsuya Yamada, 2016. "Market Liquidity and Systemic Risk in Government Bond Markets: A Network Analysis and Agent-Based Model Approach," IMES Discussion Paper Series 16-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
    13. Pick-Schen Yip & Wee-Yeap Lau & Robert Brooks, 2023. "The Liquidity Effect of the U.S. QE on Sovereign Yield Spreads of Commodity-Exporting Countries," Commodities, MDPI, vol. 2(2), pages 1-16, April.

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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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