High-Frequency Identification of Monetary Policy Shocks in Japan (Revised version of CARF-F-502)(Forthcoming in the Japanese Economic Review)

We identify monetary policy shocks in Japan during the unconventional monetary policy period using high-frequency data for interest rate futures. Following the empirical strategy of Gürkaynak, Sack, and Swanson (2005), we conduct an event study analysis to estimate the effects of the monetary policy surprises on asset prices around the timing of policy announcements made by the Bank of Japan between 1999 and 2020. We find that a monetary policy shock can be described by two factors that have statistically significant effects on the financial market. A surprise monetary tightening has negative effects on stock returns and positive effects on government bond yields, even in the low-interest environment. We also find that the responses of the longer term yields tend to be larger than those of the shorter term yields. The response is the largest for the 10-year government bond yield, which has, in the last two decades, been effectively targeted by the Bank of Japan. This finding contrasts with those of previous studies of the conventional monetary policy period, in which responses are larger for the shorter term yields.