High-frequency identification of monetary policy shocks in Japan

Area of Science:

• Economics
• Monetary Policy Analysis

Background:

• Unconventional monetary policy periods present unique challenges for analyzing economic impacts.
• The Bank of Japan's policy shifts between 1999 and 2020 warrant detailed examination.

Purpose of the Study:

• To identify and analyze monetary policy shocks in Japan during its unconventional monetary policy era.
• To estimate the impact of these shocks on asset prices, specifically stock returns and government bond yields.

Main Methods:

• Utilized high-frequency data for interest rate futures.
• Employed an event-study analysis based on Gürkaynak et al. (2005).
• Examined policy announcements by the Bank of Japan from 1999 to 2020.

Main Results:

• Monetary policy shocks are characterized by two key factors influencing financial markets.
• Monetary tightening surprises negatively impacted stock returns and positively affected government bond yields.
• Longer-term yields, particularly the 10-year government bond yield, showed larger responses compared to shorter-term yields.

Conclusions:

• Monetary policy surprises significantly affect asset prices, even in low-interest environments.
• The 10-year government bond yield's sensitivity highlights its role as a target for the Bank of Japan.
• Findings contrast with conventional monetary policy periods, where shorter-term yields typically respond more strongly.