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Financial and Capital Markets' Responses to Changes in the Central Bank's Target Interest Rate: The Case of Japan*


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     We greatly appreciate the perceptive comments of two anonymous referees as well as the Editor of this Journal, Professor Mike Wickens. We also thank Koichi Hamada, Toshiki Jinushi, Shigenori Shiratsuka for useful comments on an earlier version of this article, Tsuyoshi Nishii for research assistance, and Kohei Nishikawa, Mitsugi Okamoto and Toyoharu Takahashi for their help in obtaining data. Any remaining errors are of our own. The authors’ names are arranged in alphabetical order.


We propose new proxy variables for monetary policy shocks in Japan for the period from July 1989 to March 2001 and investigate the effects of changes in the policy target variable on stock prices and the term structure of interest rates. We find that changes in the surprise component of the target variable significantly affect both intermediate-term and long-term interest rates. A surprise decrease in the target rate of 1% leads, on average, to a 3% increase in stock prices. The magnitudes of estimated reactions of financial variables are similar in Japan and the US.