Abstract
Given that there is exceptionally high uncertainty around the domestic inflation outlook, allowing for greater flexibility in long-term Japanese Government Bond (JGB) yields by the Bank of Japan (BoJ) could be considered going forward. Against this background, this study empirically finds that a steeper JGB yield curve helps improve banks’ profitability, especially after a year lag, and the overall impact hinges on macroeconomic and financial market responses. A steeper JGB yield curve could also have spillovers on global yields. Financial sector policies to mitigate short-term vulnerabilities in case the JGB yield curve steepens could be considered, including by further strengthening engagement with financial institutions with relatively high exposure to interest rate movements, to better harness the benefits in the medium term.
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