Effectiveness of the Zero Interest Rate Policy for Financial Markets in Japan: Principal Components Analysis

Abstract

The zero interest policy was introduced by the Bank of Japan (BOJ) and kept in force from February 12, 1999 through August 11, 2000, after which the BOJ introduced the quantitative easing policy in March 19, 2001. On March 9, 2006, the BOJ exited quantitative easing amid signs that deflation was ending and the recession had disappeared. After that, the zero interest rate policy again was introduced. Quantitative easing policies has been examined a lot in the literature; however, the BOJ introduced Abenomics, an unprecedented, aggressive monetary policy, on April 4, 2013. The effectiveness of the monetary policy during the zero interest rate policy era has not been adequately discussed. This article focuses on daily Japanese stock prices during the zero interest rate era; employs a principal components analysis to determine the effectiveness of the policy; and shows domestic interest rates, US interest rates, US and China stock prices, and the exchange rate of yen/US dollar influence Japanese stock prices but that the yen/Euro exchange rate does not.