The economic consequences of the "Price Keeping Operation" in the Japanese stock markets: From August 1992 to November 1993

When the Nikkei Stock Average occasionally dropped below ¥17,000, a fear spread

over the markets that the low level of stock prices would trigger off financial instability in

Japan. It is told that some programs, the so-called "Price Keeping Operation (PKO)", were

conducted by the Japanese government to sustain stock prices above a certain level in the early

1990s. The government put restrictions on selling stocks, bought stocks with public funds by

itself, and/or froze and passed up the release of the state-owned shares. The purpose of this

paper is to analyze the structure of the policy and its economic consequences, which was

applied from August 1992 to November 1993.

With the sharp decline of the Nikkei Index below ¥17,000, the Japanese government

stimulated the trust banks and the other financial institutions, which it had cosigned, to buy

more stocks with the aim of supporting the stock markets. The trust banks and the asset

management companies did buy stocks in the spot market, under the guidance of the Japanese

government. However, at the same time, some of them hedged by selling stocks in the futures

market on the expectation that stock prices would decline furthermore. As a result of this, the

prices of the futures market and the spot market synchronously crashed. PKO could not

accomplish its purpose in the end.