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The Effectiveness of Financial Policy in the Japanese Financial Markets

A B S T R A C T Recently, financial policy has received much attention. One reason is that the worldwide fiscal condition has been bad, so expectations associated with financial policy have been increasing greatly. A precise understanding of the function of the interest rate channel is necessary to increase the effectiveness of these policies. This article examines the movements of interbank interest rates and how financial markets respond to the Bank of Japan's (Japanese central bank's) financial policy since 2001 (i.e., nontraditional, the introduction of quantitative easing policy) using an empirical examination. This paper reports on the analysis of four factors: (1) interest rate expectations, (2) risk factors from foreign countries, (3) liquidity constraints of the central bank's, and (4) announcements of financial policy to determine whether or not these factors have influenced interbank interest rates in Japan. The results show that foreign risk has influenced Japanese financial markets. The Lehman shock is one example.