The Policy Effect of Negative Interest Rate Policy on the Japanese Stock Market

Abstract

We explored the policy effect of the Japanese negative interest rate policy (NIRP) on seven domestic stock market indices in this article. To represent the whole Japanese stock market, the Nikkei 225 and TOPIX were two commonly representative indices. Moreover, we employed four financial-industry indices and one non-financial index to detail the NIRP effect on the financial sector and the non-financial sector. After controlling the quantitative easing (QE) effect and the interaction effect between NIRP and QE, we investigated the NIRP effect over Japanese equity indices in the generalized autoregressive conditional heteroscedasticity (GARCH) model. The benefits of such modeling strategies could gauge the policy impact on market profitability and market stability simultaneously. For the entire market, the estimated independent NIRP effect illustrated a positive reaction on the conditional mean and a negative response on the conditional variance of the empirical GARCH model. The aggregated outcomes for NIRP that combined the independent NIRP effect and the NIRP effect of interacting with QE would be contingent on the magnitude of QE, and large enough QE reversed the market profitability and market stability. The estimation results of the non-financial equity index and financial-industry equity indices implied the conclusion of the market profitability and market stability, respectively.