Bank of Japan Equity Purchases: The (Non-)Effects of Extreme Quantitative Easing
Ben Charoenwong, Randall Morck, Yupana Wiwattanakantang
Review of Finance, Volume 25, Issue 3, May 2021, Pages 713–743, https://doi.org/10.1093/rof/rfaa029
With the onset of the Covid-19 pandemic, the financial press has reported that central banks around the world such as the European Central Bank and the Bank of Israel have contemplated buying equity to further boost economic growth. Are massive equity purchases by central banks an effective alternative monetary policy stimulus that other central banks might use amid near zero or negative interest rates when debt market interventions grow ineffective?
In this paper, we exploit a unique empirical setting in Japan, where the Bank of Japan (BOJ) has pioneered a unique form of quantitative easing: the central bank buying and holding large equity blocks in domestic corporations since December 2010. Through March 2018, the BOJ accumulated equity index-backed exchange-traded fund (ETF) holdings worth almost ¥19.3 trillion, equivalent to 3.5% of GDP or over 75% of the total ETF market. So far, the BOJ is the only major central bank to have purchased domestic equities on such a scale. Of empirical relevance is the plausibly exogenous cross-sectional heterogeneity in index weights due to price-weighting schemes and differential index inclusion.
We find the BOJ’s ETF purchases (1) increase share prices relative to a market-weighted benchmark, (2) lead firms to raise more capital through secondary equity offerings, but (3) do not predict substantially increased corporate investment on average, but rather predict increased holdings of cash and other current assets. We conclude that these BOJ equity purchases have scant expansionary impact on corporate actions but can temper bankruptcy risk.
However, we also find evidence such purchases likely exacerbate “empire-building” problems as BOJ equity purchases are associated with increased investment in the subsample of firms without valuable growth opportunities and with weak corporate governance.
Our findings suggest that central bank purchases of equities are a problematic tool for stimulating economic growth through high broad-based private-sector corporate investment. We believe that Japan’s institutions and recent economic history leave its experience relevant to policy-makers elsewhere.