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Archives of Business Research – Vol. 12, No. 2
Publication Date: February 25, 2024
DOI:10.14738/abr.122.16558.
Kurihara, Y., Maeda, S., & Fukushima, A. (2024). Stock Prices and Exchange Rates under Monetary Policy Changes: The Cases of
Japan and the US. Archives of Business Research, 12(2). 129-141.
Services for Science and Education – United Kingdom
Stock Prices and Exchange Rates under Monetary Policy Changes:
The Cases of Japan and the US
Yutaka Kurihara
Faculty of Economics, Aichi University, Aichi, Japan
Shinichiro Maeda
Faculty of Economics, Kyushu University, Fukuoka, Japan
Akio Fukushima
The Institute for Economic Studies, Seijo University, Tokyo, Japan
ABSTRACT
This study examines exchange rates and stock prices in the context of US and
Japanese monetary policy shifts. Also, the effects of announcements made by the
monetary authorities are examined. The empirical results show that US stock prices
have positive impacts on Japanese stock prices. As predicted, there is a negative
correlation between Japanese interest rates and stock prices. Depreciation of the
Japanese yen leads to rising stock prices. Although the Bank of Japan's
announcement of “positive” news that the end of quantitative easing is expected to
cause stock prices to decline, they instead increased. In the case of the US, however,
appreciation of the US dollar promotes rising stock prices. This result is the
opposite of the Japanese case. It may be concluded that there exists good
communication between the monetary authorities and the markets, and that the
news causes no unexpected effects or confusion on the financial markets.
Keywords: Exchange rate, Monetary policy, Stock, Japan, US.
INTRODUCTION
In the 2020s, developed economies have worked to combat recession and deflation. COVID-19
has damaged economies all over the world. The pandemic damaged production activity and
supply chain disruptions occurred. The war in Ukraine began during economic restoration
activities, and prices, including those in the energy sector, soared. From the middle of 2022,
significant monetary policy changes were made in Europe and the US in an effort to lower
prices, however, a policy of quantitative easing with low interest rates has continued to be
conducted in Japan. Moreover, large and rapid changes in stock prices and exchange rates
occurred in these giant economies in 2023.
The Bank of Japan Act demonstrates that its monetary policy is aimed at "achieving price
stability, thereby contributing to the sound development of the national economy (The Bank of
Japan’s homepage)." The Bank set the price (consumer price index: CPI) stability target at 2
percent, and it has tried for over 10 years to attain the target while continuing monetary
expansion. In September 2016, the Bank introduced a new instrument for the implementation
of quantitative easing (QE). This policy has two elements: the first is "yield curve control,"
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Services for Science and Education – United Kingdom
meaning the Bank manages both short-term and long-term interest rates; the second is an
"inflation-overshooting," meaning the Bank works to increase the monetary base until the CPI
in Japan exceeds 2 percent and the situation is firmly established.
Monetary policy in the US is based on the Federal Reserve's actions which aim for maximum
employment, price stability, and moderate long-term interest rates. From March 2022, the
Federal Reserve Board (FRB) has raised interest rates to combat inflationary pressures and
nurture a strong labor market. At the March 2022 meeting, the Federal Open Market Committee
(FOMC) raised the interest rate target range for the federal funds rate from 0-1/4 percent to 0-
1/2 percent. The FOMC continued to raise the target in May and June, setting the target range
from 1-1/2 to 1-3/4 percent. However, the FOMC ceased net asset purchases in March and
began reducing its securities holdings in June. On the other hand, experts feel that the FOMC
will take into account of lowering the interest rates to boost the economy as prices become
stable in 2023.
The European Central Bank (ECB) enacts monetary policies to keep prices stable in the euro
area. From 2022, the ECB and FRB have experienced serious US inflation and 2022 marked a
significant turning point for the ECB’s monetary policies. The energy crisis brought on by the
war increased input costs of the economy along with the reopening of the economy after the
pandemic. In July 2022 the ECB raised the key ECB interest rates for the first time in 11 years.
However, high interest rates are thought to cool economic activity, so there will be a possibility
to lower the interest rates from 2024.
This study examines stock prices and exchange rates under monetary policy changes of Japan
and the US. Also, the effects of announcements made by the central banks are examined
empirically. There is a common understanding that announcements, including their effects
through transmission, need to be taken into account when implementing monetary policies.
2023 is focused on because during 2023 in Japan and the US contrarian monetary policies were
implemented.
This study is structured as follows: Section 2 reviews monetary policies in 2023 in three giant
economies: Japan, the US, and the euro area. Existing studies of the relationship between
monetary policies and stock prices/exchange rates are reviewed in Section 3. In Section 4,
preliminary empirical methods are presented for empirical analyses in the following section.
Section 5 shows the empirical results and the results are examined. Finally, a brief summary is
provided.
MONETARY POLICIES IN JAPAN, THE US, AND THE EURO AREA
This section reviews monetary policies in 2023 in the three giant economies. As explained in
Section 1, significant differing monetary policies were implemented in Japan and the US/euro
area. This study examines the relationship between monetary policies and stock
prices/exchange rates.
The other purpose of this study is to examine the effects of announcements made by central
banks on stock prices and exchange rates. The effects have been given a lot of attention recently
and it has become clear that monetary authorities should take such announcements’ effects into
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Kurihara, Y., Maeda, S., & Fukushima, A. (2024). Stock Prices and Exchange Rates under Monetary Policy Changes: The Cases of Japan and the US.
Archives of Business Research, 12(2). 129-141.
URL: http://doi.org/10.14738/abr.122.16558
account. Communication with markets in order to implement effective and sound monetary
policies has become increasingly important for monetary authorities.
Table 1 lists monetary policies of Japan, the US, and the euro area in 2023. ‘Positive’ in this table
denotes monetary tightening for Japan and also denotes monetary expansion for the US and the
euro area. As shown in the previous section, the BOJ has considered when it should change its
monetary policy stance from monetary easing to tightening. Alternatively, the FRB and ECB
have considered shifting from a tightening monetary stance to an easing one.
Table 1: Monetary policies of Japan, the US, and the euro area in 2023.
Date Central
Bank
Decisions Regarding Monetary Policy Implementation positive Neutral
Jan. 18 BOJ (Almost) unchanged *
Feb. 2 FRB The FRB decided to raise the interest rate paid on reserve
balances to 4.65 percent.
*
Feb. 2 ECB The ECB decided to raise the three key ECB interest rates by 50
basis points.
*
Mar. 16 ECB The ECB decided to increase the three key ECB interest rates by
50 basis points
*
Mar. 22 FRB The FRB decided to raise the interest rate paid on reserve
balances to 4.9 percent.
*
Apr. 28 BOJ (Almost) unchanged
May 3 FRB The FRB decided to raise the interest rate paid on reserve
balances to 5.15 percent.
*
May 4 ECB The ECB decided to raise the three key ECB interest rates by 25
basis points.
*
Jun. 14 FRB (Almost) unchanged *
Jun. 15 ECB The ECB decided to raise the three key ECB interest rates by 25
basis points.
*
Jun. 16 BOJ (Almost) unchanged *
Jul. 26 FRB The FRB decided to raise the interest rate paid on reserve
balances to 5.4 percent
*
Jul. 27 ECB The ECB decided to raise the three key ECB interest rates by 25
basis points.
*
Jul. 28 BOJ In the auction announcement for fixed-rate purchase operations
of three on-the-run issues of 10-year JGBs which the Bank will
make on every business day, unless it is highly likely that no bids
will be submitted, the Bank will set a fixed rate to be applied in
the auctions at 1.0 percent.
*
Sep. 14 ECB The ECB decided to raise the three key ECB interest rates by 25
basis points.
*
Sep. 20 FRB (Almost) unchanged *
Oct. 26 ECB (Almost) unchanged *
Oct. 31 BOJ The purchase size per auction will continue to be set in a flexible
manner, taking account of market conditions (see the
announcements of July 28).
*
Nov. 1 FRB (Almost) unchanged *
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Services for Science and Education – United Kingdom
Dec. 13 FRB (Almost) unchanged *
Dec. 14 ECB (Almost) unchanged *
Dec.19 BOJ (Almost) unchanged *
Note) Each section is based on each central bank’s announcement from their homepage.
As shown in Table 1, it is clear that each central bank had taken opposite monetary policies
between Japan and the US and between Japan and the euro area. Finally, ‘positive’ and ‘neutral’
in Table 1 are both used for empirical estimations in this study.
EXISTING STUDIES RELATED TO THIS STUDY
There have been a lot of excellent papers presented on this topic or similar topics. The
relationship between monetary policies, stock prices, and exchange rates has been analyzed
theoretically and empirically in the past. Monetary policies should not only consider short-term
effects, but also medium-term and long-term effects. However, this study focuses on short-term
effects and considers the impacts of monetary policies on stock prices and exchange rates. In
the empirical analyses that will be performed in the following section, daily data are used for
estimations.
Hajdukovic (2022) indicated that financial policies had positive effects on economies by
promoting consumption, investment, stock prices, and so on, and reduced unemployment.
Ozcelebo and Yidirim (2017) revealed that raising interest rates to dampen outflows might
reduce returns of equities. This might also deteriorate economic activities in Indonesia.
Kurniawan and Astuti (2023) showed that monetary policy transmission to growth of the
economy via equity prices and exchange rates was useful in Indonesia. However, Chao, et al.
(2011) showed that for an instantaneous US adjustment of the prices of
manufacturing, equity prices, and exchange rates might lead to mis-jumps or mis-adjustments
in the US by the monetary policy announcement.
Abouwafia and Chambers (2015) demonstrated that monetary policies and the shocks in
exchange rates had significant influence in the short term on the stock prices in Kuwait and
some other countries. Yang (2017) showed that the impacts of monetary policies
on equity prices were found in the US and four Asian economies. Fassas and Papadamou (2018)
indicated that monetary policies of easing slowed the variance premium of equity markets. Ono
(2020) suggested that the US’ unconventional quantity easing policy had no impact
on equity prices compared with the conventional policy era. Lakdawala (2021) found that
US monetary policy shocks were transferred via an unsure route, which is significant for
announcements concerning huge asset purchasing. Fausch and Sutter (2024) showed that
Swiss equity prices were influenced by conventional and unconventional monetary policies. On
the other hand, Aliyu (2009) implied that the monetary authorities in Nigeria were not limited
to taking stock market developments into account when determining their exchange rates
policy measures.
Kalyvitis and Skotida (2010) showed a “delayed overshooting” of some exchange rates caused
by a sudden US monetary policy change and found excess returns from transactions. Gong and
Dai (2017) indicated that interest rate rising and the yuan’s depreciation induced herding.
Ahmed (2020) showed that both direction changes in Egyptian pound to US dollar rates had an
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Kurihara, Y., Maeda, S., & Fukushima, A. (2024). Stock Prices and Exchange Rates under Monetary Policy Changes: The Cases of Japan and the US.
Archives of Business Research, 12(2). 129-141.
URL: http://doi.org/10.14738/abr.122.16558
influence on equity market returns. Grisse (2020) indicated that increases of Swiss
interest rates are linked to a Swiss franc appreciation against the euro and the US dollar, with
the Swiss franc continuing longer than the interest rate shocks. Tümtürk (2020) demonstrated
that there existed a two-way interaction between exchange rates and financial policies.
Javangwe and Takawira (2022) revealed that the stock market and interest rates were related
negatively. Ouma and Kihiu (2018) indicated that exchange rates and stock prices were linked
in the short term and in the long term in stock markets. Emamian and Mazlan (2021) showed
that real effective exchange rates and the US’ equity prices had a negative relationship in the
short term; however, the relationship was not significant in the long term. Yiu and Tsang (2023)
suggested that monetary and exchange rate policies decreased negative impacts on
ASEAN stock markets. On the other hand, Hartmann and Pierdzioch (2007) showed that
exchange rate movements could not explain stock returns in Japan. Ferreira, et al. (2019)
demonstrated that the exchange rates did not affect stock markets significantly in the case of
European markets. Most of the empirical results of these studies have been as expected from
the views of theoretical ones; however, some of them go against the expectations. At least from
the views of empirical ones, we have not reached consensus. This study focuses on the Japan- US 2023 case and empirically examines the relationship between monetary policies and stock
prices/exchange rates.
PRELIMINARY PREPARATION FOR EMPIRICAL ANALYSES
Before examining the relationship between monetary policies and stock prices/exchange rates,
variables used in empirical analyses are checked. “Interest rate differences (Japan minus the US
and Germany minus the US)” are used for estimations. Compared with the US, interest rates in
Japan and Germany are low, so the variables are below zero. Table 2 shows the results. It should
be noted that Japanese and US economic variables have strong relationships. The correlations
between their stock markets and other stock markets, and between their exchange rates and
stock markets are stronger than the ones between their interest rates and stock prices.
Moreover, the economic relationship between Japan and the US has been strong.
Table 2: Statistical descriptive.
Av. S.E. S.D. Var. Skewness Min. Max. No.
Exchange rate
(yen/dollar)
140.74 0.44 6.80 46.29 -1.29 128.40 151.72 232
Exchange rate
(euro/dollar)
1.08 0.00 0.02 0.00 -0.53 1.05 1.12 232
10-year GB
(Japan)
0.56 0.01 0.17 0.03 -0.87 0.25 0.96 232
10-year GB
(US)
3.98 0.29 0.43 0.19 0.52 3.30 4.98 232
10-year GB
(Germany)
2.47 0.01 0.23 0.05 -0.33 1.92 2.97 232
Nikkei 225
(Japan)
30744.40 157.00 2391.32 5718385.92 -1.27 25716.86 33753.33 232
Dow Jones
(US)
34114.24 74.20 1130.13 1277201.34 1.15 31759.87 37661.52 232
DX 15686.11 33.06 503.52 253530.86 0.05 14436.31 16794.43 232