2002 Reports

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

Narita, Junji

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.