This study examines the effects of the Bank of Japan's (BOJ) large-scale equity purchases on the Nikkei 225 during the coronavirus (COVID-19) pandemic. Although the BOJ started equity purchases in 2010, the purchased amount reached unprecedented levels when the pandemic broke out. The large-scale purchases provide a natural experiment to examine how effective the central bank's equity purchases were in the crisis. Unlike previous studies, we use intra-day data and investigate the purchase effects allowing for endogeneity. We first derive the BOJ's intra-day reaction function by estimating probit models. From this reaction function, we then calculate the BOJ's unexpected and expected purchases and examine their effects on the Nikkei 225 returns in the Tokyo Stock Exchange's afternoon session. We find that the BOJ's unexpected large-scale purchases had large positive instantaneous impacts on intra-day returns during the pandemic. However, the large positive impacts arose because most of the purchases came as big surprises to the markets. We argue that the policy would be effective only if the BOJ continues to surprise the market. We also argue that the BOJ's purchases increased the volatility of the Nikkei 225.
Fukuda et al. (Thu,) studied this question.