Research

This paper analyses how the Japanese Exchange Traded Fund (ETF) market size affects the volatility of the underlying assets. Similar to the U.S. case, Japanese ETFs magnify the volatility of the underlying assets, transmitting exogenous shocks through the rebalancing process. However, Japan represents the only developed country where central bank purchases dominate the ETF market; moreover, the Bank of Japan (BoJ)'s counter-cyclical policy mitigates the impact of ETFs on the volatility of the underlying asset prices. Finally, this paper shows that the BoJ's ETF purchase program protects the market from negative shocks, although it tends not to intervene in the case of positive shocks, thereby generating a biased mitigation effect.

In the last few decades, central bankers and economists have paid little attention to monetary aggregates, in contrast with the experience of the 1970s and the 1980s. Our evidence shows that monetary aggregates lose relevance when central banks maintain low and stable inflation, as has occurred in recent decades. However, to move from unstable to stable inflation, our findings also show that attention to monetary aggregates is needed. Our findings help resolve the long-standing controversy about the importance of monetary aggregates for the conduct of monetary policy: monetary aggregates are vital to move from unstable to stable inflation but lose relevance once a central bank has consistently reached price stability.

This paper examines the recent decline of the value premium in the Japanese market since the late 2000s, and discuss similarities and differences between the Japanese and US markets. We adopt the analytical framework of Fama and French (2021) using predictive regression with the book-to-market (BM) ratio and the framework by Arnott et al. (2021) based on the return decomposition of HML returns. The level and volatility of the Japanese BM ratio significantly changed toward the end of 1990s; thus, careful consideration in splitting the sample periods is needed in examining the predicting ability of BM ratio about the portfolio returns sorted by the firm size and BM ratio. We find the predictable component of Japanese HML returns is relatively stable over time, and the recent decline in HML returns is mostly explained by the unpredictable decline in the valuation of value stocks relative to growth stocks after the Global Financial Crisis in the late 2000s. This is consistent with the results reported in existing studies on the US market. The evidence provided by the decomposition of HML returns also supports the findings of this study's analysis.