Response of Asset Prices to Monetary Policy under Abenomics

In this paper, I investigate the causes of the recent sharp response of the yen and J apanese stock prices to the discussion of, and the subsequent implementation of bold monetary easing by the B ank of J apan as demanded by P rime M inister A be. I present statistical evidence that the response of the two asset prices have indeed been unusually large relative to the past experience with nonconventional monetary policy ( NCM ) even after allowance is given for the rise in global economic activity and asset prices. I also point out that the rally has been led by speculative trading by foreign investors, while domestic investors have largely stayed on the sidelines. I discuss possible reasons for such foreign investor behavior. Simply put, the unprecedented political pressure raised hopes of the adoption of bold measures by the B ank of J apan. I discuss, however, the possibility that the room for further action by the Bank is quite limited apart from what might be called a targeted helicopter drop of money. I also point out the possibility that investor behavior may have not been based on economic fundamentals. The asset price volatility since A pril 2013 is interpreted in the light of such discussions.