Quantitative Easing and Liquidity in the Japanese Government Bond Market

Kentaro Iwatsubo and Tomoki Taishi
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Kentaro Iwatsubo: Graduate School of Economics, Kobe University
Tomoki Taishi: Graduate School of Economics, Kobe University

No 1623, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: The "Quantitative and Qualitative Monetary Easing (QQE)" enacted immediately after the inauguration of the Bank of Japan Governor Kuroda brought violent fluctuations in the prices of government bonds and deteriorated market liquidity. Does a central bank fs government bond purchasing policy generally reduce market liquidity? Do conditions exist that can prevent the decrease? This paper analyzes how the Bank of Japan fs purchasing policy changes influenced market liquidity. The results revealed that three specific policy changes contributed significantly to improving market liquidity: 1) increased purchasing frequency; 2) a decrease in the purchase amount per transaction; and 3) a reduced variability in the purchase amounts. These policy changes facilitated investors f 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 fs informational environment.

Pages: 27 pages
Date: 2016-09
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-mon
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Citations: View citations in EconPapers (7)

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