Impacts of Japan’s negative interest rate policy on Asian financial markets

The Bank of Japan (BOJ) adopted a series of unconventional monetary policies after the global financial crisis (GFC). In particular, after the introduction of the “Quantitative and Qualitative Monetary Easing (QQE)” on 4 April 2013, the BOJ became highly aggressive in its unconventional policy. The BOJ expanded the QQE on 31 October 2014. However, regardless of dramatic increases in the base money, the QQE 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, "QQE with a Negative Interest Rate" on 29 January 2016 and "QQE with Yield Curve Control" on 21 September 2016.

The purpose of this paper is to explore what spillover effects the Japan’s negative interest rate policy (NIRP) had on Asian financial markets. Unlike the QQE without a negative interest rate, the NIRP not only had limited impacts on the Japanese economy but also raised a serious concern about profitability of local financial institutions. It is thus likely that its spillover effects were different from those of the QQE without a negative interest rate. In the analysis, we examine spillover effects on Asian stock markets using daily data downloaded from Datastream. Using a generalized autoregressive conditional heteroskedasticity (GARCH) model, we find that Japan’s long-term interest rate had significantly negative effects on the Asian stock prices in the NIRP period. We also find that the spillover effects were especially significant through a decline of excess returns in Japan’s financial sector. The results imply that the NIRP which lowered long-term rate below zero might have benefited Asian economies. We discuss that this might have happened because local financial institutions who lost their profit opportunities in domestic markets explored a new profit opportunity in emerging Asia after the NIRP was announced.