The Impact of Long-term Cross-currency Basis Swap on Japanese Government Bonds: Analysis of Different Non-traditional Monetary Policy Regimes

A cheaper yen gives foreign investors strong incentives to buy Japanese Government Bonds (JGBs) of 5 and 10 years under the comprehensive easing policy regime. The purchase of JGBs by foreign investors using a cheaper yen funded on a negative basis in the long-term basis swap market contributes to the declining yield of JGBs under the comprehensive easing policy regime. When the Bank of Japan introduced a quantitative and qualitative easing policy, and then a negative interest rate policy, the trend observed under the comprehensive easing policy changed. This was because long-term basis swap rate tended not to decline under the quantitative and qualitative easing policy and negative interest rate policy regimes in comparison with under the comprehensive easing policy regime.