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Financial Market Functioning and Monetary Policy: Japanfs Experience

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Author Info

  • Naohiko Baba

    (Director and Senior Economist, Institute for Monetary and Economic Studies and Financial Markets Department (currently, Financial Markets Department), Bank of Japan (E-mail: naohiko. baba@boj.or.jp))

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    Abstract

    This paper reviews the financial market functioning under the zero interest rate policy (ZIRP) and the subsequent quantitative monetary easing policy (QMEP) conducted by the Bank of Japan (BOJ). First, the estimation results of the Japanese government bond yield curve using the Black-Gorovoi-Linetsky (BGL) model show that (1) the shadow interest rate has been negative since the late 1990s, turned upward in 2003, and has been on an uptrend since then, and (2) the first-hitting time until the negative shadow interest rate hits zero again under the risk-neutral probability is estimated to be about three months as of the end of February 2006. Second, under the ZIRP and QMEP, the risk premiums for Japanese banks have almost disappeared in short-term money markets such as the market for negotiable certificates of deposit, while they have remained in the credit default swap market and the stock market. This result supports the view that market participants have positively perceived the BOJfs ample liquidity provisions in containing the near- term defaults of banks caused by the liquidity shortage.

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    File URL: http://www.imes.boj.or.jp/research/papers/english/me24-s1-5.pdf
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    Bibliographic Info

    Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

    Volume (Year): 24 (2006)
    Issue (Month): S1 (December)
    Pages: 39-71

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    Handle: RePEc:ime:imemes:v:24:y:december:i:s1:p:39-71

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    Related research

    Keywords: Bank of Japan; Term structure of interest rates; Zero lower bound; Zero interest rates; Quantitative monetary easing policy; Bank risk premium;

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    References

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    1. Naohiko Baba & Motoharu Nakashima & Yousuke Shigemi & Kazuo Ueda, 2005. "The Bank of Japan's Monetary Policy and Bank Risk Premiums in the Money Market," CIRJE F-Series CIRJE-F-374, CIRJE, Faculty of Economics, University of Tokyo.
    2. Duffee, Gregory R, 1999. "Estimating the Price of Default Risk," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 197-226.
    3. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
    4. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary policy alternatives at the zero bound: an empirical assessment," Finance and Economics Discussion Series 2004-48, Board of Governors of the Federal Reserve System (U.S.).
    5. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    6. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    7. Ruslan Bikbov & Mikhail Chernov, 2010. "No-arbitrage macroeconomic determinants of the yield curve," Post-Print peer-00732517, HAL.
    8. Ito, Takatoshi & Harada, Kimie, 2004. "Credit Derivatives Premium as a New Japan Premium," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 965-68, October.
    9. Black, Fischer, 1995. " Interest Rates as Options," Journal of Finance, American Finance Association, vol. 50(5), pages 1371-76, December.
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