The Impacts of Japans Negative

Interest Rate Policy on Asian

Financial Markets
Shin-ichi Fukuda
University of Tokyo

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development
Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences
of their use. Terminology used may not necessarily be consistent with ADB official terms.

1
Motivation of this paper
This paper explores what spillover effects Japans unconventional monetary
policy, especially the negative interest rate policy (NIRP), had on Asian
financial markets.
After the 200709 GFC, central banks in advanced countries implemented a
new set of unconventional monetary policies.
A number of studies suggested that the highly accommodative monetary
policies had large spillover effects on the rest of the world, especially on
emerging market economies (EMEs) .
Some also found that unconventional monetary policies in advanced
countries had large spillover effects on emerging Asian economies.
But few explored spillover effects of the Japanese NIRP.

2
Japan's Unconventional Monetary Policy
Date Description Governor
19-Dec-08 Lowering of the Bank's target for the uncollateralized Shirakawa
overnight call rate by 20 basis points; it will be encouraged
to remain at around 0.1 percent
18-Dec-09 The midpoints of most Policy Board members' "understanding" Shirakawa
are around 1 percent CPI inflation rate
5-Oct-10 Comprehensive Monetary Easing Shirakawa
22-Jan-13 The "2% Price Stability Target" under the Framework for the Shirakawa
Conduct of Monetary Policy
4-Apr-13 Introduction of the "Quantitative and Qualitative Monetary Kuroda
Easing (QQE)"
31-Oct-14 Expansion of the Quantitative and Qualitative Monetary Easing Kuroda
29-Jan-16 Introduction of "Quantitative and Qualitative Monetary Easing Kuroda
with a Negative Interest Rate"
21-Sep-16 New Framework for Strengthening Monetary Easing: Kuroda
"Quantitative and Qualitative Monetary Easing with Yield Curve
Control" 3
Why did the BOJ introduce the NIRP?
Unlike central banks in the other advanced countries, the base money
in Japan had changed rather modestly until 2012.
However, it started to increase dramatically when the BOJ introduced
the QQE in April 2013.
Its growth rate was accelerated when the QQE was expanded in
October 2014.
However, regardless of the dramatic increases in the base money, the
BOJ could not achieve the price stability target of 2 percent.
This was why the BOJ introduced a new framework for strengthening
monetary easing, that is, the NIRP on 29 January 2016.

4
Why do we need to analyze the effects of the
NIRP?
Unlike the QQE without a negative interest rate, the NIRP had limited
impacts on the yen-dollar exchange rate and stock prices in Japan.
Instead it had substantial impacts on long-term interest rates and raised a
concern about profitability of financial institutions in Japan.
The concern rose partly because its announcement was unexpected for
most financial institutions but mostly because the zero bound was still
relevant for some of the interest rates even in the NIRP.
It is thus likely that its spillover effects were very different from those of
the QQE without a negative interest rate.
In the analysis, we examine spillover effects on stock markets in Republic of
Korea, Singapore, Taipei China, and Thailand.

5
Japanese Government Bond (JGB) Yields
%
1.2
1
0.8
0.6
0.4
0.2
0

2016/5/2
2012/1/2
2012/5/2

2012/9/2
2013/1/2
2013/5/2

2013/9/2
2014/1/2
2014/5/2

2014/9/2
2015/1/2
2015/5/2

2015/9/2
2016/1/2

2016/9/2
-0.2
-0.4
-0.6

10 year 9 year 8 year 7 year

6 year 5 year 4 year 3 year
2 year 1 year

6
Hourly Yen-dollar Exchange Rate after the
Policy Announcements
108
106
104
102
100
98
96
94
92
-5

100
-15
-25
-20

-10

0
5

25

65
10
15
20

30
35
40
45
50
55
60

70
75
80
85
90
95
QQE1 QQE2 NIRP1 NIRP2

7
Intra-daily Data of the Nikkei 225 Stock Price
Index
115

110

105

100

95

90

5+1
5+4
5+7
6+3
0-2
0+1
1+2
1+5
2+1
2+4
2+7
3+3
3+6
4+2
4+5

6+6
-1-7
-1-4
-1-1

QQE1 QQE2 NIRP1 NIRP2

8
Daily Stock Price Indexes of the Financial
Sector: Advanced countries
120

110

100
USA
90 UK
GERMANY
80
FRANCE
70
JAPAN
60

9
Empirical Model: GARCH (1, 1)

(1a) = a + =1
=0

+ =1
=0 + =1 =1 + ut,
is stock returns in Asian economy i (i = Republic of Korea,
Singapore, Taipei China, and Thailand),
is Japans financial variable h,
is stock returns in Asian economy k (k =China and Hong Kong),
is financial variable l in Europe or in the United States.

10
Dependent variable
Daily country-specific equity returns in Asia
Seoul Composite Index,
Singapore (SES) Strait Times Index,
Taiwan Weighted Price,
Thailand SET-Index
We chose these four Asian economies partly because they have a
developed stock market but partly because their market size is not
large enough to have significant reverse causality to Japans financial
variables.

11
Japans financial variable h
daily change of 10-year Japanese government bond (JGB) yields,
daily returns of the Nikkei 225 stock price index,
daily change of the dollar-denominated yens exchange rate
We pay a special attention to the spillover effects of 10-year JGB
yields before and after the NIRP.

12
Four subsample periods
Pre-QQE period: 5 October 2010 to 3 April 2013,
The QQE1 period: 4 April 2013 to 30 October 2014,
The QQE2 period: 31 October 2014 to 28 January 2016,
The NIRP1 period: 29 January 2016 to 20 September 2016.
This version did not include the NIRP2 period (i.e., from 21
September 2016) because of limited sample size.

13
 Basic Estimation Results: Pre-QQE period
Republic of Korea Singapore Taipei, China Thailand
Variable Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic
constant 0.000 -0.05 0.000 0.50 0.000 0.24 0.001 2.98 ***
Japan Nikkei 225 0.188 6.32 *** 0.084 3.90 *** 0.192 5.16 *** 0.025 0.83
financial Nikkei 225(-1) -0.006 -0.20 0.000 0.00 0.023 0.72 0.013 0.41
shocks JGB yields 0.007 0.35 0.003 0.19 0.024 1.21 -0.013 -0.69
JGB yields(-1) 0.012 0.71 -0.013 -1.12 0.009 0.47 -0.003 -0.17
Yen 0.016 0.33 0.020 0.55 0.071 1.47 0.014 0.25
Yen(-1) 0.238 4.49 *** 0.009 0.26 0.142 3.25 *** 0.001 0.01

14
 Basic Estimation Results: QQE1 period
Republic of Korea Singapore Taipei, China Thailand
Variable Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic
constant 0.000 -0.22 0.000 -0.99 0.000 0.81 0.001 1.42
Japan Nikkei 225 0.117 4.27 *** 0.079 3.55 *** 0.091 3.52 *** 0.057 1.34
financial Nikkei 225(-1) -0.038 -1.48 -0.002 -0.13 0.020 0.78 -0.009 -0.27
shocks JGB yields -0.040 -2.56 ** -0.015 -0.87 -0.010 -0.44 -0.010 -0.40
JGB yields(-1) 0.035 1.82 * 0.000 0.01 0.004 0.23 0.037 1.25
Yen 0.014 0.30 -0.106 -2.78 *** -0.004 -0.08 -0.121 -1.57
Yen(-1) 0.124 2.33 ** 0.031 0.54 0.145 2.04 ** 0.256 3.06 ***

15
 Basic Estimation Results: QQE2 period
Republic of Korea Singapore Taipei, China Thailand
Variable Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic
constant 0.000 0.25 0.000 -1.20 0.000 -0.53 -0.001 -1.41
Japan Nikkei 225 0.198 5.69 *** 0.116 3.16 *** 0.166 3.61 *** 0.063 1.28
financial Nikkei 225(-1) -0.016 -0.55 -0.003 -0.08 0.004 0.10 -0.049 -1.14
shocks JGB yields 0.010 0.45 0.022 1.15 -0.016 -0.69 -0.040 -2.01 **
JGB yields(-1) 0.013 0.58 0.015 0.78 -0.002 -0.09 0.030 1.31
Yen -0.012 -0.16 -0.161 -2.69 *** -0.054 -0.68 -0.230 -2.90 ***
Yen(-1) 0.156 1.91 * 0.037 0.50 -0.022 -0.19 -0.023 -0.23

16
 Basic Estimation Results: NIRP1 period

Republic of Korea Singapore Taipei, China Thailand

Variable Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic
constant 0.000 -0.41 0.000 -0.87 0.000 0.55 0.001 1.56
Japan Nikkei 225 0.172 5.52 *** 0.095 2.06 ** 0.058 1.85 * 0.048 1.07
financial Nikkei 225(-1) 0.027 0.78 0.068 1.48 0.041 1.10 -0.004 -0.09
shocks JGB yields 0.001 0.29 -0.049 -2.41 ** -0.035 -2.72 *** -0.014 -0.67
JGB yields(-1) -0.009 -0.49 -0.009 -0.30 -0.035 -1.66 * -0.039 -1.79 *
Yen 0.120 2.27 ** 0.027 0.35 -0.026 -0.43 -0.136 -2.07 **
Yen(-1) 0.015 0.22 0.186 2.26 ** 0.073 0.98 0.111 1.19

17
Summary of basic estimation results (1)
Even if we control these external effects, some of the three financial
variables in Japan had significant spillover effects on the stock price
index in each of the four Asian economies.
A shock in the Japans stock market had significantly positive impacts
on the stock prices in Asian economies.
In particular, the Nikkei stock price index took large positive values in
Republic of Korea throughout the subsample periods.
The yen-dollar exchange rate took large positive values (i.e., a beggar-
thy-neighbor effect) in Republic of Korea throughout the subsample
periods.
18
Summary of basic estimation results (2)
The effects of the 10-year JGB yields on the Asian stock prices were, if
any, limited in most of the Asian economies before the NIRP was
announced.
This means that a change of low but still positive long-term interest
rate in Japan had limited spillover effects on the Asian economies.
However, except in Republic of Korea, the 10-year JGB yields took
significantly negative sign in the NIRP1 period.
This means that a decline of long-term interest rate might have
benefited Asian economies after the 10-year JGB yields fell below
zero.
19
Interpretations
The NIRP made not only short-term but also long-term interest rates
negative.
The prevailed negative interest rates raised a serious concern about
profitability of local financial institutions in Japan.
Local commercial banks experienced substantial decline in the margin
between domestic lending rates and deposit rates.
Local institutional investors such as insurance companies, trust funds, and
pension funds lost their profit opportunities in domestic markets.
They needed to explore a new profit opportunity outside Japan.
Financial markets in emerging Asia were their natural choice.
It is likely that their changed investment behavior benefited Asian
economies, especially their financial sector.

20
Net Purchases of Foreign Long-term Securities
by Life Insurance Companies
billion yen
250
Introduction
200 of the NIRP
Introduction
150 of the QQE

100

50

0 Jul-08

Jan-12

Jul-15
Jan-05

Jun-11
Mar-06

May-07

Apr-10
Feb-09

Nov-10

May-14
Dec-14
Dec-07

Mar-13
Aug-05

Sep-09

Aug-12

Feb-16
Sep-16
Oct-06

Oct-13
-50

-100

21
Two extensions
Estimation for Financial Sectors Stock Prices in Asia
- It is likely that their changed investment behavior of Japanese local
institutional investors benefited Asian financial sector more than other
Asian sectors.
Estimation for Stock Prices in Advanced Economies
- It is likely that advanced economies may not be attractive new
investment destinations for Japanese financial institutions.

22
Daily Stock Price Indexes of the Financial
Sector: Emerging Asia
140
130
120 JAPAN
110 CHINA
100 HONG KONG
90 KOREA
80
TAIWAN
70
SINGAPORE
60
THAILAND
2016/7/1
2016/8/1
2016/9/1
2016/1/1
2016/2/1
2016/3/1
2016/4/1
2016/5/1
2016/6/1

2016/10/1
23
 Results for Financial Sectors Stock Prices :
QQE1 period
Republic of Korea Singapore Taipei, China Thailand
Variable Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic
constant 0.000 0.564 0.000 -0.820 0.000 0.702 0.001 0.813
Japan Nikkei 225 0.146 3.277 *** 0.076 3.432 *** 0.077 2.348 ** 0.167 2.728 ***
financial Nikkei 225(-1) -0.065 -1.714 * 0.002 0.099 0.005 0.158 -0.060 -1.265
shocks JGB yields -0.007 -0.293 -0.026 -1.479 0.009 0.310 -0.050 -1.273
JGB yields(-1) 0.029 0.959 -0.009 -0.516 0.009 0.383 0.048 1.187
Yen 0.067 0.896 -0.101 -2.324 ** 0.050 0.792 -0.093 -0.977
Yen(-1) 0.140 1.345 0.002 0.028 0.076 0.932 0.274 2.157 **

24
 Results for Financial Sectors Stock Prices :
NIRP1 period
Republic of Korea Singapore Taipei, China Thailand
Variable Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic
constant -0.001 -0.92 0.000 -0.87 0.001 2.33 ** 0.000 -0.13
Japan Nikkei 225 0.215 5.42 *** 0.110 2.31 ** 0.151 3.38 *** 0.112 1.29
financial Nikkei 225(-1) 0.088 1.42 0.082 1.56 0.021 0.41 -0.020 -0.22
shocks JGB yields 0.026 0.85 -0.059 -2.90 *** -0.056 -2.39 ** -0.019 -0.44
JGB yields(-1) 0.064 2.12 ** 0.005 0.19 -0.008 -0.29 -0.083 -2.13 **
Yen 0.056 0.54 0.029 0.40 -0.025 -0.27 -0.125 -0.96
Yen(-1) -0.110 -1.01 0.192 2.07 ** 0.057 0.65 0.200 1.35

25
Interpretations of the Estimation Results for
Asian Financial Sector
The effects of the 10-year JGB yields had more contrasting features before
and after the NIRP period for Asian financial sector.
In the pre-NIRP periods, they were small and insignificant in all of the Asian
economies.
This means that a change of low but still positive long-term interest rate in
Japan had no spillover effect on the Asian financial sectors.
In contrast, its spillovers became larger and more significant in all of the
Asian economies in the NIRP1 period.
Except in Republic of Korea, a decline of long-term interest rates below
zero in Japan benefited Asian financial sectors.
It is likely that the changed behavior of Japanese financial institutions
might have benefited the financial sector in most of the Asian economy.

26
 Estimation Results for Advanced Economies :
NIRP1 period
UK Germany USA
Variable Coef. z-Statistic Coef. z-Statistic Coef. z-Statistic
constant 0.001 0.80 0.001 0.76 0.001 1.49
Japan Nikkei 225 0.116 1.94 * 0.255 3.85 *** -0.020 -0.82
financial Nikkei 225(-1) 0.045 0.76 0.164 2.21 ** 0.037 1.23
shocks JGB yields -0.013 -0.39 0.004 0.09 0.017 0.98
JGB yields(-1) -0.004 -0.12 0.029 0.76 -0.002 -0.15
Yen -0.139 -1.30 -0.367 -2.93 *** -0.205 -4.91 ***
Yen(-1) 0.090 0.86 0.133 0.87 0.020 0.35

27
Interpretations of the Estimation Results for
Advanced Economies
Unlike in the Asian stock markets, the 10-year JGB yields never had a
significant effect on the stock prices in the advanced economies.
This means that unlike in Asia, a decline of long-term interest rates
below zero in Japan did not benefit the advanced economies.
In the NIRP period, the changed behavior of Japanese financial
institutions might have benefited many of Asian economies.
But when exploring a new profit opportunity outside Japan, financial
markets in advanced economies were not attractive investment
destinations because their long-term interest rates had already fallen
enough.
28
Summary of the main results in this paper
This paper explored what spillover effects the Japans negative interest rate
policy (NIRP) had on Asian stock markets.
Unlike the QQE without a negative interest rate, the QQE with a negative
interest rate had limited impacts on the Japanese economy.
In particular, the NIRP brought various undesirable consequences to the
Japanese financial sector.
It is thus likely that its spillover effects were very different from those of
the QQE without a negative interest rate.
Our empirical result suggested that spillovers from Japans financial shocks
to Asian stock markets had contrasting features in the NIRP period which
were not observed in the pre-QQE or the QQE periods.
In particular, they showed that the NIRP might have benefited Asian
economies, especially their financial sector.
29
Implications of the main results in this paper
One notable consequence of the NIRP was that not only short-term but also long-
term interest rates became negative.
Under prevailed negative interest rates, most of the Japanese local financial
institutions lost their profit opportunities in domestic markets.
They thus needed to explore a new profit opportunity outside Japan.
When exploring a new profit opportunity outside Japan, financial markets in
emerging Asia, rather than those in advanced economies, were their natural
choice.
They are still risky but potentially highly profitable investment destinations.
It is likely that their changed investment behavior benefited Asian economies,
especially their financial sector.
Our empirical results supported the view.

30
Some reservations
However, it is worthwhile to note that the notable spillovers of the NIRP
might have happened under a special environment in Japan.
After the BOJ introduced the QQE with Yield Curve Control (NIRP2) on 21
September 2016, it seems that the NIRP no longer had the beneficial
spillover effects on Asian economies.
Even in the NIRP2, short-term interest rates remained significantly
negative.
But unlike in the NIRP1, long-term interest rates increased to zero in the
NIRP2.
This mitigated a concern among Japanese financial institutions and made
the international spillovers insignificant.
31