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Why do commercial banks hold government bonds? The case of Japan

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  • Ogawa, Kazuo
  • Imai, Kentaro

Abstract

We investigate the determinants of the demand for Japanese government bonds (JGBs) by commercial banks in Japan. In particular, by estimating portfolio equations for JGB demand and bank loans, based on a panel data set from the late 1990s to the 2000s, we rigorously test the popular assertion that the long stagnation of the real economy caused a shift in the portfolios of commercial banks from bank lending to JGBs. We find that the popular assertion is not empirically supported. Rather, the portfolio shift from loans to JGBs has been caused by a fall in the ratio of the loan rate to unit lending costs, or the bank’s price–cost margin for lending.

Suggested Citation

  • Ogawa, Kazuo & Imai, Kentaro, 2014. "Why do commercial banks hold government bonds? The case of Japan," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 201-216.
    • Handle: RePEc:eee:jjieco:v:34:y:2014:i:c:p:201-216
    DOI: 10.1016/j.jjie.2014.07.002
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    References listed on IDEAS

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    8. Homma, Tetsushi & Tsutsui, Yoshiro & Uchida, Hirofumi, 2014. "Firm growth and efficiency in the banking industry: A new test of the efficient structure hypothesis," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 143-153.
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    Cited by:

    1. Aneta Hryckiewicz & Petra Pawlowski & Piotr Michal Mazur & Marcin Borsukb, 2022. "Sovereign Debt Holding and Bank Sensitivity toward Market Risk: An Alternative View of the Bank–Sovereign Problem," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-52, December.
    2. Carlos Alberto Piscarreta Pinto Ferreira, 2023. "Drivers of Sovereign Bond Demand – The Case of Japans," Working Papers REM 2023/0264, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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