Transmission of monetary policy expectations on the money markets: Comparative analysis of nontraditional monetary policy regimes in Japan

• Author: Takayasu Ito
• DOI: http://doi.org/10.1002/jcaf.22401
• Date: 01 October 2019
• Published date: 01 October 2019

BLIND PEER REVIEW

Transmission of monetary policy expectations on the money

markets: Comparative analysis of nontraditional monetary

policy regimes in Japan

Takayasu Ito

School of Commerce, Meiji University,

Tokyo, Japan

Correspondence

Takayasu Ito, School of Commerce, Meiji

University, Tokyo, Japan.

Email: tito747@meiji.ac.jp

Abstract

When the Bank of Japan (BOJ) adopts interest rate targeting under a comprehensive

easing policy, the term structure up to 12 months in the Japanese money market is

driven by a single trend. It is caused by monetary policy expectations. The regime of

interest rate targeting gives a sense of comfort to market participants that the regular

transmission mechanism works in the term structure of the money market. Thus,

monetary policy expectations are fully transmitted to the yield curve end. On the

other hand, monetary policy expectations are not fully transmitted to the yield curve

end under either the quantitative and qualitative easing policy or the negative easing

policy. The quantitative and qualitative easing policy and the negative interest rate

policy paralyze the market function in the short-term money market.

KEYWORDS

monetary policy expectations, money market, non-traditional monetary policy

1|INTRODUCTION

The Bank of Japan (BOJ) adopts nontraditional monetary

policies to fight against deflation after the collapse of Leh-

man Brothers. The BOJ adopts interest rate targeting on the

uncollateralized call rate before April 4, 2013, and intro-

duces a quantitative and qualitative easing policy on April

4, 2013. The operating target changes from the interest rate

to the monetary base. The BOJ introduces a quantitative and

qualitative easing policy with a negative interest rate on

January 29, 2016. It introduces a negative interest rate while

maintaining the framework of the quantitative and qualita-

tive easing policy. The operating target is both the interest

rate and the monetary base.

The term structure of interest rates is important in the con-

duct of monetary policy. According to Angeloni and Rovelli

(1998), “there are three potentially useful roles that the term

structure of interest rates can perform in the monetary policy

process”:“the transmission role, the informational role”,and

“the policy indicator role”. The transmission of interest rates

along the term structure is an integral part of the mechanism

through which monetary policy influences the economy. This

is closely connected to the ability of a central bank to influence

interest rates with various maturities that are relevant for the

consumption decisions of households and firms. Especially

when the benchmark rate is negative, markets expect that room

for a central bank to lower the rate is limited in comparison

with a rate hike. Thus, a central bank is supposed to have more

difficulty in controlling market interest rates through monetary

policy expectations formed by communication with financial

markets. “The importance of communication has been increas-

ing recently”, as mentioned in Blinder (2004).

This study uses the overnight indexed swap (OIS) rate to

represent monetary policy expectations. The OIS rate is usu-

ally based on a derivative contract on the overnight rate. It is

a measure of the market's expectation of the overnight fund's

rate over the term of the contract. As Thornton (2009) points

out, “there is very little default risk in the OIS market

because there is no exchange of principal”. The funds are

exchanged solely at the maturity of the contract when one

Received: 9 May 2019 Accepted: 30 May 2019

DOI: 10.1002/jcaf.22401

48 © 2019 Wiley Periodicals, Inc. J Corp Acct Fin. 2019;30:48–53.wileyonlinelibrary.com/journal/jcaf