What is it about?
During the past two decades, chronic fiscal deficits have led to elevated and rising ratios of government debt to nominal GDP in Japan. Nevertheless, long- term Japanese government bonds’ (JGBs) nominal yields initially declined, and have since stayed remarkably low and stable. This is contrary to the received wisdom which holds that higher government deficits and indebtedness will exert upward pressures on nominal yields. This paper examines the relationship between JGBs’ nominal yields and short-term interest rates, as well as other factors, such as low inflation, persistent deflationary pressures, and tepid growth.
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Why is it important?
This paper examines the relationship between JGBs’ nominal yields and short-term interest rates, as well as other factors, such as low inflation, persistent deflationary pressures, and tepid growth.
Perspectives
Japan has monetary sovereignty, which gives the Japanese government the ability to service its debt, and enables the Bank of Japan (BOJ) to keep JGBs’ nominal yields low by ensuring that short-term interest rates are low, and by using various other tools of monetary policy. The argument that short-term interest rates and monetary policy are the primarily drivers of long-term interest rates follows John Maynard Keynes’s (1930) insights
Dr Tanweer Akram
Citigroup Inc
Read the Original
This page is a summary of: Understanding the Low Yields of the Long-Term Japanese Sovereign Debt, Journal of Economic Issues, June 2014, Taylor & Francis,
DOI: 10.2753/jei0021-3624480206.
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