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The Bond Market and Fiscal Balance

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  • Toru Nakazato

Abstract

It is important that the fiscal positions of government bodies are appropriately assessed by the markets for the bonds they issue, thereby allowing market regulations on fiscal management to function effectively and promoting sound fiscal management. This article examines the relationship between the financial conditions of local governments (creditworthiness) and the local bond yields (spread versus Japanese national government bonds), and conducts an empirical analysis of the trading market for public subscription bonds. According to the calculations conducted in this study, (1) there is a significant difference in interest rates (of five to seven basis points) between public subscription bonds issued by agencies with a rating of AA versus AA-; and (2) the ordinary balance ratio (i.e., ordinary expenses as a percentage of ordinary revenue) and the outstanding local borrowing ratio (i.e., outstanding amount in relation to standard local government revenue) have a significant positive correlation with public subscription bond yields, thereby confirming that a worsening of the financial situation has worked to increase the spread between local bonds and national government bonds. These results suggest that the conventional view that "there are no differences in the creditworthiness of different local governments because they are all backed by the national government" has been abandoned.

Suggested Citation

  • Toru Nakazato, 2011. "The Bond Market and Fiscal Balance," Japanese Economy, Taylor & Francis Journals, vol. 38(1), pages 59-80.
    • Handle: RePEc:mes:jpneco:v:38:y:2011:i:1:p:59-80
    DOI: 10.2753/JES1097-203X380103
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    Cited by:

    1. Hattori, Takahiro & Miyake, Hiroki, 2015. "Empirical Analysis of Yield Determinants in Japan’s Municipal Bond Market: Does Credit Risk Premium Exist?," MPRA Paper 67127, University Library of Munich, Germany.
    2. Hattori, Takahiro, 2018. "Decomposing Japanese municipal bond spreads: Default and liquidity premiums in times of crisis," Journal of Asian Economics, Elsevier, vol. 59(C), pages 16-28.
    3. Naoyuki Yoshino & Tetsuro Mizoguchi, 2013. "Change in the Flow of Funds and the Fiscal Rules Needed for Fiscal Stabilization," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(1), pages 51-70, January.

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