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The Bank of Japan’s ETF Purchase during COVID-19

The Bank of Japan (BOJ) started to purchase equity exchange-traded funds (ETFs) in 2010 and doubled its annual target amount in 2020 during COVID-19 to decrease equity risk premia as part of its unconventional monetary policy. This study demonstrates that the BOJ times the market by buying ETFs after observing negative overnight and morning stock returns and stopping purchase after seeing positive overnight and morning returns. Lunchtime returns are higher on the day of the actual ETF purchase, especially during the COVID-19 pandemic, suggesting that the program takes effect through the scarcity channel. Although the announcement of the doubled budget did not have an immediate effect on stock prices, we observe consistent increases in stock prices and decreases in volatility after the announcement. The BOJ’s commitment to counter-cyclical ETF purchase may have contributed to a lower equity risk premium by providing investors with downside protection.