Bank of Japan’s Exchange Traded Fund Purchases as Part of Japan’s Unconventional Monetary Policy

This study focuses on the Bank of Japan’s (BOJ) purchases of exchange-traded funds (ETFs), which began in December 2010, and uses high-frequency data to estimate its policy reaction function. In addition, it examines the impact of the central bank’s largescale and continuous purchases on the stock market. The results of the discrete choice model show that the BOJ purchases ETFs is affected by the return of the Tokyo Stock Exchange Stock Price Index (TOPIX) from the previous day’s close to the morning close of the day, the deviation of the TOPIX morning close from the 5-day moving average, and the morning realized volatility measured by the high-frequency data were confirmed to have been affected by the ETF purchases. Moreover, the estimated effects of ETF purchases on stock returns and volatility were statistically significant, indicating that afternoon stock returns on days when the BOJ purchased ETFs tended to be higher than those on days when there were no purchases, and that realized volatility tended to be lower. Conversely, it is difficult to conclude that the BOJ’s ETF purchases fulfilled their intended purpose of “lowering risk premium in the market” in this respect. The effects of the ETF purchase policy must be discussed on a broader scale and over a broader time horizon.