International Conference on Economics, Finance & Business, Venice

ANALYSIS OF SUPER LONG TERM INTEREST RATES IN JAPAN UNDER DIFFERENT REGIMES OF YIELD CURVE CONTROL

TAKAYASU ITO

Abstract:

This paper focuses on the asymmetrical impacts of YCC under different regimes on JGB and swap markets in the super long term. The JGB yields and the swap rates are used on a daily basis from September 21, 2016 to February 29, 2024. The maturities are 10 years, 15 years, 20 years, and 30 years. These data are provided by Refinitiv Datastream. The entire sample period is divided into two. The first period, Sample A, runs from September 21, 2016 to March 18, 2021. The second period, Sample B, runs from March 19, 2021 to February 29, 2024. JGB and swap markets increased in volatility after the BOJ expanded the range of the 10-year JGB yield from between -0.2% and 0.2%” to between -0.25% and 0.25% on 19 March 2021. First, the non-stationarities of the original data are checked by conducting ADF and KPSS tests. Next, ADF and KPSS tests are conducted for the data with a first difference. Finally Engle-Granger cointegration tests are applied. The data are confirmed to be I (1). No cointegration relationship is found in any of the maturities in Sample A. Market segmentation is observed between JGB and swap markets in Sample A. However, the JGB yields and swap rates have cointegration relationships in the maturities of 15, 20, and 30 years in Sample B. They are integrated except for the maturity of 10 years. In other words, arbitrage works between two markets. After the BOJ expanded the range of the YCC to between -0.25% and 0.25% on March 18, 2021, structural changes occurred in the super long term in regard to JGBs and swap markets. The decision by the BOJ has contributed to the normalization of the market function because there has been more room for the benchmark JGB yield of 10 years to move more actively. This paper analyzes the integration of JGB and swap markets in the super long term. There is room to examine the transmission from JGB yield and swap rate of 10 years to 15 years, 20 years, and 30 years, which I would like to focus on as an area of study in the future.

Keywords: interest rate, monetary policy, yield curve control