The Bank of Japan's Large-Scale Government Bond Purchases and the Formation of Long-Term Interest Rates

This paper quantitatively examines the effects of the Bank of Japan's (BOJ's) purchases of Japanese government bonds (JGBs) - especially the large-scale purchases since the introduction of Quantitative and Qualitative Monetary Easing in 2013 - on the formation of long-term interest rates in Japan using time series analysis. The results can be summarized as follows. First, having quantified the effect of BOJ JGB purchases taking market participants' expectations about the future path of such purchases into account, we find that the effect of JGB purchases on interest rates has been driven by the increase in JGB holdings (i.e., the stock effect), which affects market participants' risk allocation, rather than by the daily conduct of JGB purchases (i.e., the flow effect), which affects supply and demand in the secondary market. Second, in addition to the flow and stock effects, the Yield Curve Control framework introduced in September 2016 had the effect of restraining interest rate increases when long-term interest rates approached the upper bound of the announced range. This effect tended to be larger when the BOJ took countermeasures and market participants expected such countermeasures. Finally, our analysis of interest rates at different maturities suggests that the framework of government bond purchases and Yield Curve Control had an effect on interest rates across a wide range of maturities, and that the recent large-scale monetary easing had the effect of pushing down the entire yield curve.