JGBs’ chronically low nominal yields: a VEC approach

ABSTRACT

Low short-term interest rates, induced by the Bank of Japan’s (BoJ) accommodative monetary policy, is mainly responsible for keeping long-term Japanese government bonds’ (JGBs) nominal yields exceptionally low for a protracted period. Elevated government debt and deficit ratios do not exert upward pressure on JGBs’ nominal yields. This paper provides an empirical investigation of chronically low nominal yields of JGBs from a Keynesian perspective. It deploys a Vector Error Correction (VEC) approach to model long-term government bond yields.

KEYWORDS:

• Japanese government bonds
• Bank of Japan
• nominal bond yields
• long-term interest rates
• JGBs

JEL CLASSIFICATION:

• E43
• E50
• E58
• E60
• G12

Highlights

• Low short-term interest rate is responsible for keeping Japanese government bonds’ (JGBs) nominal yields low.

• The Bank of Japan influences JGBs’ nominal yields through the short-term interest rate and various monetary policy actions.

• Elevated government debt and deficit ratios do not exert upward pressure on JGBs’ nominal yields.

• This paper presents models of JGBs’ nominal yields from a Keynesian perspective.

• This paper deploys a vector error correction approach to model JGBs’ nominal yields.

Acknowledgments

The authors thank participants at various workshops and conferences for their valuable comments and suggestions. The authors also thank Ms. Elizabeth Dunn for her copyediting.

Disclaimer

The authors’ institutional affiliations are provided solely for identification purposes. Views expressed are solely those of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

The data set is available for replication

The data set used in the empirical part of this paper is available upon request to bona fide researchers for the replication and verification of the results.

Notes

¹ Unit roots tests are also conducted on additional variables and their first differences. The results of the unit root tests on the nominal yields of JGBs of other tenors (2, 3, 6, 7, 8, 10, 15, 20, 25, 30, and 40 years) are consistent with the nominal yields of JGBs of 5 and 9 year tenors. The results of the unit root tests on CPI excluding fresh food are consistent with CPI excluding food and energy. The results of the unit root tests on Japanese government net lending as a percentage of nGDP, and Japanese government gross financial liabilities as a percentage of nGDP are consistent with Japanese government primary balance as a percentage of nGDP, and Japanese government net financial liabilities as a percentage of nGDP. These additional results are provided in the Appendix of the working paper (see Tables A1 and A2).

² Model 1´, Model 2´ and Model 3´ use JGB5Y_Q instead of JGB9Y_Q. Additional results using nominal yields JGBs of other tenors (2, 3, 6, 7, 8, 10, 15, 20, 25, 30 and 40 years) are consistent with the results provided here. Tables with additional results (Appendix Table A3 and A4) are available upon request.

³ Signs in Table 7are reversed because of the normalization process.

Additional information

Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.