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Quantitative Easing and Liquidity in the Japanese Government Bond Market

Author

Listed:
  • Kentaro Iwatsubo

    (Graduate School of Economics, Kobe University)

  • Tomoki Taishi

    (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.

Suggested Citation

  • Kentaro Iwatsubo & Tomoki Taishi, 2016. "Quantitative Easing and Liquidity in the Japanese Government Bond Market," Discussion Papers 1623, Graduate School of Economics, Kobe University.
    • Handle: RePEc:koe:wpaper:1623
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    File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2016/1623.pdf
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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. Boneva, Lena & Islami, Mevlud & Schlepper, Kathi, 2021. "Liquidity in the German corporate bond market: Has the CSPP made a difference?," Discussion Papers 08/2021, Deutsche Bundesbank.
    3. Lena Boneva & David Elliott & Iryna Kaminska & Oliver Linton & Nick McLaren & Ben Morley, 2022. "The Impact of Corporate QE on Liquidity: Evidence from the UK," The Economic Journal, Royal Economic Society, vol. 132(648), pages 2615-2643.
    4. Mr. Fei Han & Dulani Seneviratne, 2018. "Scarcity Effects of Quantitative Easing on Market Liquidity: Evidence from the Japanese Government Bond Market," IMF Working Papers 2018/096, International Monetary Fund.
    5. Naoshi Tsuchida & Toshiaki Watanabe & Toshinao Yoshiba, 2016. "The Intraday Market Liquidity of Japanese Government Bond Futures," IMES Discussion Paper Series 16-E-07, Institute for Monetary and Economic Studies, Bank of Japan.

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