To lend or not to lend: the Bank of Japan's ETF purchase program and securities lending

Summary

Focus

We study the effects of the Bank of Japan's (BOJ) ETF purchasing programme on stock returns, focusing particularly on the role of the stock lending market. In 2010, the BOJ established a programme to conduct outright purchases of various financial assets to stimulate the economy. This policy is unique as a monetary policy because equity index-tracking exchange-traded funds (ETFs) were included in those assets. The BOJ has continuously increased its purchasing amounts and its market presence has provoked discussions on how it has affected the market's structure.

Contribution

While some previous studies show that the programme significantly affected Japanese stock prices, these arguments relied solely on demand and supply in the spot market, almost completely ignoring the role of the stock lending market. To fill this gap, this study investigates the effects of the ETF purchasing programme by focusing on both spot and stock lending markets. The stock lending market plays an important role because ETF managers freely lend out their holdings of stocks that constitute ETFs purchased by the BOJ, thus changing the demand-supply balance in the spot market.

Findings

Using individual stock level data, we show evidence of the two channels through which the ETF programme affects stock returns. First, the programme has a positive effect on stock returns by shifting the demand curve in the spot market upwards, especially for stocks with limited availability in the lending market (special stocks). Second, in the longer term, the BOJ's accumulated purchases lower lending fees in the stock lending market and weaken the effects of the BOJ's purchases on stock returns, particularly for special stocks. The results suggest that the BOJ's accumulated purchases increase the supply of lendable shares in the lending market, thus diminishing the effect of the ETF programme.

Abstract

This study investigates the effects of the Bank of Japan's (BOJ) exchange-traded fund (ETF) purchase program on stock returns, particularly focusing on the role of the stock lending market. Using firm-level panel data, we find that the BOJ's purchases raised stock returns more for those stocks with limited availability in the stock lending market. Nonetheless, over the longer term, the BOJ's accumulated purchases lowered lending fees and weakened the effects of their purchases on stock returns. This result suggests that ETF managers supply stocks that constitute ETFs held by the BOJ to the stock lending market, which weakens the policy effects of the program.

JEL classification:  E58, G12, G14

Keywords: large-scale asset purchase (LSAP), ETF purchase program, stock lending market, Bank of Japan