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Paper short abstract

This study examines the macroeconomic effects of unconventional monetary policy via open market operations in Japan from 2003 to 2019. Using MO-based indices and a regime-switching framework, we show that policy effectiveness peaked during 2008–2016 and declined after yield curve control.

Paper long abstract

The Bank of Japan (BoJ) plays a central role in shaping Japan’s monetary policy and, by extension, the country’s economic stability, inflation, and financial market conditions. Its policy decisions influence borrowing costs, asset prices, and expectations of households and firms. In recent years, this role has drawn renewed attention as the new Governor, Kazuo Ueda, began to raise interest rates, signaling a potential shift away from Japan’s long-standing ultra-loose monetary stance.

When conventional interest rate policy reached its limits following the 2008 global financial crisis, central banks in major advanced economies turned to unconventional monetary policy (UMP) tools. A key component of these policies has been open market operations (MOs)—central bank purchases and sales of financial assets aimed at influencing liquidity, interest rates, and broader financial conditions. In Japan, MOs became an essential policy instrument well before and after the crisis, as the economy struggled with deflation and weak growth.

This study examines how UMP implemented through MOs affected Japan’s macroeconomy between 2003 and 2019. To do so, we construct four monetary policy indices based on MOs. One index captures the overall scale of quantitative easing, while the other three measure liquidity provision targeted at different segments of financial markets. Using an empirical framework that allows policy effects to change over time, we identify three distinct policy regimes: the period before mid-2008, the crisis and post-crisis period from mid-2008 to mid-2016, and the period after mid-2016.

A key finding is that the widely noted policy shift in April 2013, when the BoJ introduced quantitative and qualitative easing, did not represent a fundamental break in policy effectiveness. Instead, unconventional policies conducted through MOs were most powerful during the second regime, when they had strong and broad effects on economic activity, inflation, government bond prices, and stock markets. In contrast, after the introduction of yield curve control in 2016, the effectiveness of MO-based policies declined significantly.

This presentation also reviews recent developments in Japanese monetary policy and discusses their implications for the future policy direction of the BOJ.