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

Abstract

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. JEL Classification Numbers: E62

The Empirics of Long-Term Us Interest Rates

“…In contrast to Keynes's view, the conventional wisdom as expressed in the empirical literature on government bond yields, such as Baldacci and Kumar (2010), Gruber and Kamin (2012), Lam and Tokuoka (2011), Poghoysan (2012), and Tokuoka (2012, is that public financial variables have a decisive influence on government bonds' nominal yields. In the conventional view, increased (decreased) government indebtedness and the deterioration (improvement) of government fiscal deficits are associated with higher (lower) nominal yields on government bonds.…”

An inquiry concerning long-term U.S. interest rates using monthly data

“…Most recent theoretical and empirical research on the determinants of government bonds yields and sovereign bond spreads emphasizes that government fiscal variables are the key drivers of interest rates, both on a long-run and a short-run basis. Various studies, such as Baldacci and Kumar (2010), Gruber and Kamin (2012), Lam and Tokuoka (2013), Paccagnini (2016), Poghoysan (2014), Reinhart and Rogoff (2009), and Tokuoka (2012) reiterate and reinforce this point. The existing literature focuses primarily on government fiscal variables, such as the ratios of government net lending/borrowing (fiscal balance) to nominal GDP, gross debt to nominal GDP, or net debt to nominal GDP, rather than short-term interest rates and the central bank's actions.…”

“…, Gruber and Kamin (2012),Lam and Tokuoka (2013), Poghoysan (2014), and Tokuoka (2012). Keynes's views on the role of the central bank in influencing long-term interest rate have support in contemporary macroeconomic theory.…”

An Inquiry Concerning Long-Term US Interest Rates Using Monthly Data

“…Various studies, such as Baldacci and Kumar (2010), Gruber and Kamin (2012), Lam and Tokuoka (2013), Paccagnini (2016), Poghoysan (2014), Reinhart andRogoff (2009), andTokuoka (2012) reiterate and reinforce this point. The existing literature focuses primarily on government fiscal variables, such as the ratios of government net lending/borrowing (fiscal balance) to nominal GDP, gross debt to nominal GDP, or net debt to nominal GDP, rather than short-term interest rates and the central bank's actions.…”