Bank of Japan as a Contrarian Stock Investor: Large-Scale ETF Purchases

Abstract

This study unveils the Bank of Japan’s behavior of purchasing exchange-traded funds (ETFs) on the Tokyo Stock Exchange. The Bank purchases ETFs after observing a significantly negative stock return over the previous night and during the morning market. The Bank stops purchasing ETFs when an overnight and morning stock return becomes positive. This unique counter-cyclical purchase behavior is consistent with its objective of decreasing equity risk premia and stimulating spending. Our study sheds light on a central bank’s program to purchase equity when the interest-rate policy is ineffective.

Keywords: large-scale asset purchases (LSAP), quantitative easing (QE), central banking, exchange-traded funds (ETF), unconventional monetary policy

JEL Classification: E52, E58, G11