Japanese Government Bond Yields Research Articles

JGB Yield Curve and Macro-Financial Stability

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.

A note on modelling yield curve control: A target-zone approach

This note uses a target-zone model to study the bond yield movements under yield curve control. The bond yield is assumed to be quasi-bounded in a band, but can breach a cap under a restricted condition of its dynamics. The empirical results using the 10-year Japanese Government Bonds suggest that this model can describe the yield dynamics under yield curve control. Co-integration results show spill-over effects from US Treasury yields to the Japanese Government Bond yield dynamics. While the bond yield was bounded below the caps, the conditions for breaching the caps were met in October 2018 and March 2021.

The Evolution of Monetary Policy Focal Points

With near-zero policy rates becoming the norm in many advanced economies, the focus on long-term bond yields has strengthened considerably. The unconventional monetary policy decision by the Bank of Japan (BOJ) in September 2016 to explicitly target the ten-year Japanese government bond (JGB) yield institutionalized this process—by effectively creating a new monetary policy focal point. In this article, we study the importance of such focal points. Empirically, we also investigate how JGB benchmark maturities ranging from one to thirty years has affected other benchmark maturities over time. We find that the ten-year bond, indeed, became more influential in 2016. However, the effect was surprisingly short-lived. The results suggest that once financial market participants anchored their expectations of the ten-year JGB yield to the new BOJ target, the attention merely shifted towards even longer maturities. Contrary to the logic of the monetary transmission mechanism, we also find the short end of the yield curve has been an absorber, rather than transmitter, of influence during the last decades.

Do Fiscal Policy News Shocks Affect Jgb Yield? Evidence from COVID-19

This is a pioneering study that investigates how fiscal news affects the yield of the Japanese Government Bond (JGB), by using intraday data. Since the Japanese government is the largest spender in the world, during the COVID-19 pandemic, this period provides the ideal situation or setting to test how fiscal news affects JGB yield. Taking advantage of the minute by minute data about fiscal news during this pandemic, we find that negative fiscal news significantly but temporarily increased JGB yield, although it is not a persistent effect. We also find that investors do care about negative news but not about the positive news. These results suggest that the JGB is considered a risk-free asset among investors, but the result also signals to the Japanese government to work on sound management of debt sustainability from a long-term perspective.

Estimating the Monetary Policy Measures of Japan in Shadow/ZLB Term Structure Model

In this paper, we follow the estimation methodology proposed by Krippner (2015) and use Japanese government bond yield curve data to estimate a shadow/ZLB term structure model. This model provides three estimated monetary policy measures, SSR, ETZ and EMS, which can be used to gauge the stance of monetary in a consistent way in both ZLB and non-ZLB environment. Japan has experienced a long period of the ZLB since 1999. The policy rate has already lost its function as an appropriate quantitative measure of monetary policy. The SSR estimated from the shadow/ZLB term structure model can evolve to negative level in the ZLB environment and provide consistent view of the stance of monetary policy as the positive short policy interest rate dose in the normal non-ZLB environment. The ETZ answers the question that how long the short interest rate will be expected to be restricted by the ZLB, which can be useful for the central bank as a reference for exit strategy of unconventional monetary easing or forward guidance on public expectation formation. The EMS measures the stance of monetary policy, relatively tight or relatively loose, in a consistent and comparable way under both ZLB and non-ZLB environment. The analysis shows that all three measures exhibit very good traceability of monetary policy in Japan, which can also be used as the proxy variables for the stance of monetary policy in other econometric procedures for policy evaluation.

Long‐term interest rates under negative interest rate policy: Analysis of Japanese government bond and swap markets

AbstractMarket segmentation is observed in the Japanese government bond (JGB) and swap markets of 2‐, 3‐, 4‐, 5‐, 7‐, and 10‐year maturities under negative interest rate policy regime. This also means that the arbitrage between the JGB and swap markets does not work in these maturities. After the Bank of Japan introduces a yield curve control policy under negative interest rate policy, market segmentation is observed only in the JGB and swap markets of 7‐ and 10‐year maturities. In the maturities of 2, 3, 4, and 5 years, the JGB yield and the swap rate co‐move. The market function recovers and arbitrage works between the JGB and swap markets in these maturities.

On the Effect of Bank of Japan’s Outright Purchase on the JGB Yield Curve

This paper examines an impact of Bank of Japan (BOJ)’s outright purchase on the Japanese government bond (JGB) yield curve. Particularly, we develop a simple state space model, which incorporates new factors regarding the BOJ’s announcement for its outright purchase and the current market outstanding with standard level and spread factors. Based on the model with a filtering method, we also implement an empirical analysis with time series of the BOJ’s announcement records during 2014/10/22–2017/8/3 in the quantitative–qualitative easing period to estimate the sensitivities of interest rates against the changes in the market expectation for the net supply with each sector of JGB. We expect the current work provides a basis for considering quantitative effects on the term structure by BOJ’s policy changes such as termination or significant reduction of the BOJ’s outright purchase. For instance, our scenario analysis shows substantial increase in the 30 year yield with widening of 20–30 year spread.

On the Effect of Bank of Japan's Outright Purchase on the JGB Yield Curve

This paper examines an impact of Bank of Japan (BOJ)'s outright purchase on the JGB (Japanese government bond) yield curve. Particularly, we develop a simple state space model, which incorporates new factors regarding the BOJ's announcement for its outright purchase and the current market outstanding with standard level and spread factors. Based on the model with a filtering method, we also implement an empirical analysis with time series of the BOJ's announcement records during 2014/10/22-2017/8/3 in the quantitative-qualitative easing(QQE) period to estimate the sensitivities of interest rates against the changes in the market expectation for the net supply with each sector of JGB. We expect the current work provides a basis for considering quantitative effects on the term structure by BOJ's policy changes such as termination or significant reduction of the BOJ's outright purchase. For instance, our scenario analysis shows substantial increase in the 30 year yield with steepening of 20-30 year spread.

Bond Supply and Excess Bond Returns in Zero-Lower Bound and Normal Environments: Evidence from Japan

We estimate a discrete-time version of the Vayanos and Vila (2009) preferred-habitat model, using Japanese government bond yield data. The estimated results indicate that bond excess returns become more sensitive to bond supply in the absence of a zero lower bound constraint unless arbitrageurs become willing to take on more risk.

Does High Yield Spread Dampen Economic Growth? The Case of US-Japan

<p><em>This article focuses on the empirical relationship between the United States’ and Japan’s yield spread of interest rates and economic growth in Japan. The yield spread is defined in this article as the difference between the Japanese government bond yield minus the US government bond yield. Some studies have tackled this issue and found a negative relationship between the yield spread and economic growth; however, recent studies have shown no or a weak relationship. This problem has not yet reached consensus in spite of its importance. As the Japanese interest rate has been quite low since the adoption of the zero interest rate policy at the end of 1990s, the situation may change the results. The empirical results show that reliability of yield spread as a leading indicator of output growth exists in Japan; however, term structure of interest rate is not related to output growth.</em><em></em></p>

An Empirical Approach to Modeling the Term Structure of the Japanese Government Bond Yields

This paper aims to empirically model the term structure of the Japanese government bond (JGB) yields. Specifically, we use bivariate-vector error correction models (VECMs) and attempt to capture the relations between various shorter-term and longer-term JGB yields. The interesting findings derived from our investigations by applying VECMs are as follows. 1) First, we find that the linkage between longer-term JGB yields and shorter-term JGB yields is effectively captured by the cointegrating equations (CEs) in the VECMs. 2) Second, we also reveal that, in general, the CEs in the VECMs for the JGBs’ term structure statistically significantly explain the next month’s time-series changes of the longer-term JGB yields.

Does High Yield Spread Dampen Economic Growth?

This article focuses on the empirical relationship between the United States’ and Japan’s yield spread of interest rates and economic growth in Japan. The yield spread is defined in this article as the difference between the Japanese government bond yield minus the US government bond yield. Some studies have tackled this issue and found a negative relationship between the yield spread and economic growth; however, recent studies have shown no or a weak relationship. This problem has not yet reached consensus in spite of its importance. As the Japanese interest rate has been quite low since the adoption of the zero interest rate policy at the end of 1990s, the situation may change the results. The empirical results show that reliability of yield spread as a leading indicator of output growth exists in Japan; however, term structure of interest rate is not related to output growth.

Budget deficits, government debt, and long-term interest rates in Japan

This study analyzes the relationship between budget deficits, government debt, and interest rates using Japanese data. Employing the event study methodology, we find that the directions, declarations, and implicit suggestions by Japanese prime ministers regarding economic countermeasures are considered by market participants as signals for future fiscal expansion. In addition, the probability that the 10-year Japanese Government Bond (JGB) yields increase by these statements correlates with the monthly increments in the leading index of business conditions and the number of newly issued bonds in the relevant supplementary budgets. Moreover, by estimating the reduced form equations for the long-term interest rates derived in the neoclassical framework, we find that a percentage point increase in both the projected/current deficit-to-GDP ratio and projected/current primary-deficit-to-GDP ratios raises real 10-year interest rates by 26–34 basis points. However, the increases in the projected are found to be more significant than those in the current. Furthermore, we find that the current government debt to GDP ratio only raises the rates by 1.2 basis points at most. These results suggest that the projected deficit is important than the current deficit and that budget deficits have larger effects than government debt, which are consistent with Feldstein (1986). Finally, on the basis of a factorial decomposition based on an estimation result in the current deficit case, we estimate that the real budget deficit in 2008 causes an approximately 2–3% increase in the JGB yields, which depresses the real GDP by 0.39–0.63 percentage points in 2008, on the basis of the preceding literature on private investment.

Endogenous monetary policy shifts and the term structure: Evidence from Japanese government bond yields

I construct a no-arbitrage term structure model with endogenous regime shifts and apply it to Japanese government bond (JGB) yields. This model subjects the short-term interest rate to monetary regime shifts, specifically a zero interest rate policy (ZIRP) and normal regimes, which depend on macroeconomic variables. The estimates show that under the ZIRP regime, the effect of deflation (inflation) on lowering (raising) bond yields amplifies on the long end of yield curves, compared with a case with positive interest rates under the normal regime. On the other hand, output gaps’ ability to raise bond yields weakens for all maturities.

Endogenous Monetary Policy Shifts and the Term Structure: Evidence from Japanese Government Bond Yields

I construct a no-arbitrage term structure model with endogenous regime shifts and apply it to Japanese government bond (JGB) yields. This application subjects the short-term interest rate to monetary regime shifts, such as a zero interest rate policy (ZIRP) and normal regimes, which depend on macroeconomic variables. The estimated results show that under a ZIRP, the deflationary effect on bond yields increases on the longer end of yield curves; on the other hand, the effect of output gaps on raising bond yields weakens for all maturities.

Assessing the Risks to the Japanese Government Bond (JGB) Market

Despite the rise in public debt, Japanese Government Bond (JGB) yields have remained low and stable, supported by steady inflows from the household and corporate sectors, high domestic ownership of JGBs, and safe-haven flows from heightened sovereign risks in Europe. Over time, however, the market’s capacity to absorb new debt will likely shrink as population ages and risk appetite recovers. In the short term, a decline in fund supply from the corporate sector, where financial surpluses are abnormally high, and spillovers from global financial distress could push up JGB yields. Fiscal reforms to reduce public debt more quickly and lengthen the maturity of government bonds will help limit these risks.

Assessing the Risks to the Japanese Government Bond (JGB) Market

Despite the rise in public debt, Japanese Government Bond (JGB) yields have remained low and stable, supported by steady inflows from the household and corporate sectors, high domestic ownership of JGBs, and safe-haven flows from heightened sovereign risks in Europe. Over time, however, the market's capacity to absorb new debt will likely shrink as population ages and risk appetite recovers. In the short term, a decline in fund supply from the corporate sector, where financial surpluses are abnormally high, and spillovers from global financial distress could push up JGB yields. Fiscal reforms to reduce public debt more quickly and lengthen the maturity of government bonds will help limit these risks.

The Outlook for Financing Japan's Public Debt

Despite the rapid rise in public debt and large fiscal deficits, Japanese Government Bond (JGB) yields have remained fairly stable. Possible factors include: Japan's sizeable pool of household savings, presence of large and stable institutional investors, and strong home bias. These factors are likely to persist for some time, but going forward, the market's capacity to absorb debt is likely to diminish, as population aging reduces savings inflows and financial reforms enhance risk appetite. This could in turn strengthen the link between JGB yields and the stock of public debt. In light of these structural changes in the market, fiscal consolidation will be key for maintaining market stability.

The Outlook for Financing Japan’S Public Debt

Despite the rapid rise in public debt and large fiscal deficits, Japanese Government Bond (JGB) yields have remained fairly stable. Possible factors include: Japan's sizeable pool of household savings, presence of large and stable institutional investors, and strong home bias. These factors are likely to persist for some time, but going forward, the market's capacity to absorb debt is likely to diminish, as population aging reduces savings inflows and financial reforms enhance risk appetite. This could in turn strengthen the link between JGB yields and the stock of public debt. In light of these structural changes in the market, fiscal consolidation will be key for maintaining market stability.

“Extended Black” term structure models

This paper examines “Extended Black” term structure models (EBTSM), which are multi-factor extensions of the one-factor Black model (Black, F., 1995. Interest rates as options. Journal of Finance 50, 1371–1376). EBTSM are not affected by the admissibility restrictions that plague canonical affine models. EBTSM encompass quadratic models, but unlike in quadratic models bond yields are sufficient statistics to infer the latent factors driving the short interest rate. EBTSM are amenable to econometric estimation despite the need to solve bond pricing equations through finite difference numerical methods. Estimation through the Iterated Extended Kalman filter reveals that a two-factor EBTSM fit well the observed cross section and time series of Japanese Government bond yields. A three-factor EBTSM is also proposed.