Quantitative Easing and Liquidity in the Japanese Government Bond Market

• Date: 01 September 2018
• Published date: 01 September 2018
• DOI: http://doi.org/10.1111/irfi.12134
• Author: Tomoki Taishi,Kentaro Iwatsubo

Quantitative Easing and Liquidity in

the Japanese Government Bond

Market*

KENTARO IWATSUBO

†

AND TOMOKI TAISHI

‡

†

Graduate School of Economics, Kobe University, Kobe, Japan and

‡

Market Operations, Osaka Exchange, Inc., Osaka, Japan

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.

JEL Codes: G14

I. INTRODUCTION

In April 2013, newly inaugurated Bank of Japan Governor Kuroda accelerated the

bank’s quantitative easing program and initiated the purchase of long-term

government bonds. This was called the “Quantitative and Qualitative Monetary

Easing (QQE)”. Although the Japanese financial market responded strongly to

this policy, the government bond market recorded historically violent

fluctuations. For example, rates on mid-term Japanese government bonds (JGBs)

such as two-year and five-year bonds rose before slowly decreasing over time,

while rates on long-term (10-year) and super long-term (20-year) JGBs briefly fell

* The authors are grateful to Editor Prof. Ramazan Gencay, an anonymous referee, Takashi Hatakeda,

Bernd Hayo, Kazuhito Ikeo, Kazuhiko Ohashi, Wataru Ohta, Paolo Pasquariello, Jie Qin, Ghon Rhee,

Toshio Serita, Hideki Takada, Toyoharu Takahashi, Hitoshi Takehara, Yasuhiko Tanigawa, Kazuo

Ueda, Toshiaki Watanabe, and Toshinao Yoshiba, as well as the seminar participants at the Bank of

Japan Finance Workshop. This work was supported by JSPS KAKENHI Grant Number 16K03742 and

17H02546, and JCER Research Grant.

© 2017 International Review of Finance Ltd. 2017

International Review of Finance, 2017

DOI: 10.1111/irfi.12134

International Review of Finance, 18:3, 2018: pp. 463–475

DOI:10.1111/irfi.12134

© 2017 International Review of Finance Ltd. 2017