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Quantitative Easing and Liquidity in the Japanese Government Bond Market

Author

Listed:
  • Kentaro Iwatsubo

    (Professor, Graduate School of Economics, Kobe University (E-mail: iwatsubo@econ.kobe-u.ac.jp))

  • Tomoki Taishi

    (Manager, Market Operations, Osaka Exchange, Inc. (E-mail: t-taishi@jpx.co.jp))

Abstract

The gQuantitative and Qualitative Monetary Easing h 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 fs government bond purchasing policy generally reduce market liquidity? Do conditions exist that can prevent this decrease? This study analyzes how the Bank of Japan fs purchasing policy changes influenced market liquidity. The results reveal 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) 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.

Suggested Citation

  • Kentaro Iwatsubo & Tomoki Taishi, 2016. "Quantitative Easing and Liquidity in the Japanese Government Bond Market," IMES Discussion Paper Series 16-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:16-e-12
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    References listed on IDEAS

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    Cited by:

    1. Toshiyuki Sakiyama & Tetsuya Yamada, 2016. "Market Liquidity and Systemic Risk in Government Bond Markets: A Network Analysis and Agent-Based Model Approach," IMES Discussion Paper Series 16-E-13, Institute for Monetary and Economic Studies, Bank of Japan.
    2. Martijn Boermans & Viacheslav Keshkov, 2018. "The impact of the ECB asset purchases on the European bond market structure: Granular evidence on ownership concentration," DNB Working Papers 590, Netherlands Central Bank, Research Department.
    3. Boneva, L. & Elliott, D. & Kaminska, I. & Linton, O. & McLaren, N. & Morley, B., 2019. "The Impact of QE on Liquidity: Evidence from the UK Corporate Bond Purchase Scheme," Cambridge Working Papers in Economics 1937, Faculty of Economics, University of Cambridge.
    4. Loriana Pelizzon & Marti G. Subrahmanyam & Reiko Tobe & Jun Uno, 2018. "Scarcity and Spotlight Effects on Liquidity and Yield: Quantitative Easing in Japan," IMES Discussion Paper Series 18-E-14, Institute for Monetary and Economic Studies, Bank of Japan.

    More about this item

    Keywords

    Monetary Policy; Quantitative Easing; Liquidity; Government Bond;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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