It is widely acknowledged that the Bank of Japan’s (BOJ) Exchange-Traded Fund (ETF) purchase programme had a profound impact on Japan’s stock market. Analysts and investors have often argued that such large-scale interventions distorted market valuations, artificially elevating prices beyond fundamental levels. At the same time, the growing number of ETFs held by the BOJ was associated with increased activity in the securities lending market, where stocks are borrowed and lent, often for short selling. This relationship suggested that while the central bank’s actions influenced market prices, the market itself contained mechanisms that worked to restore efficiency and counterbalance these distortions.

A recent study led by Dr Junnosuke Shino, Associate Professor at Waseda University’s Faculty of International Research and Education, in collaboration with Dr Mitsuru Katagiri from Waseda’s Faculty of Commerce and Dr Koji Takahashi from the Bank of Japan’s Institute for Monetary and Economic Studies, explores this dynamic in depth. Published in The Review of Asset Pricing Studies on 4 September 2025, their research sheds new light on the complex interaction between central bank policy and market forces. The authors reveal that the BOJ’s ETF purchases not only pushed up stock prices directly but also had significant ripple effects in the securities lending market, demonstrating how different parts of the financial system respond to large-scale policy interventions.

The researchers found that as the BOJ increased its ETF holdings, more shares became available for borrowing, making short selling easier. This rise in short-selling activity helped offset some of the upward pressure on stock prices caused by the BOJ’s purchases, weakening the initial price-boosting effect. Their findings show that the equity and lending markets are deeply interconnected, with ETFs acting as a bridge between the two. In this sense, the study provides evidence of the market’s self-correcting capacity—an adaptive response that maintains a degree of efficiency even under heavy central bank intervention.

What distinguishes this study is its empirical grounding in actual stock market data, lending real-world credibility to its conclusions. The authors highlight that the securities lending market plays a crucial role in moderating policy-driven distortions, ensuring that liquidity and price discovery are not entirely compromised. They also emphasise that central bank asset purchases influence financial markets through both direct and indirect channels, underscoring the need for policymakers to consider these wider effects when designing or unwinding such programmes. Given that the BOJ still holds tens of trillions of yen in ETF assets, these insights will be particularly valuable as Japan contemplates how to scale back its holdings without destabilising markets.

Beyond Japan, the study’s implications extend to global monetary authorities and investors alike. As other central banks experiment with unconventional policy tools, Japan’s experience offers a unique case study of how large-scale equity purchases interact with broader market mechanisms. For international investors, understanding the link between ETF holdings and securities lending can improve strategies for risk management and asset allocation. Ultimately, Dr Shino and his colleagues show that markets remain dynamic ecosystems: even in the face of extraordinary central bank intervention, they adapt, rebalance, and seek efficiency through interconnected channels that continue to shape the modern financial landscape.

More information: Mitsuru Katagiri et al, To Lend or Not to Lend: The Bank of Japan’s ETF Purchase Program and Securities Lending, The Review of Asset Pricing Studies. DOI: 10.1093/rapstu/raaf008

Journal information: The Review of Asset Pricing Studies Provided by Waseda University