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Market Participants' Behavior and Pricing Mechanisms in the JGB Markets -- Analysis of Market Developments from the End of 1998 to 1999 --

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Listed:
  • Yosuke Shigemi

    (Bank of Japan)

  • Sotaro Kato

    (Bank of Japan)

  • Yutaka Soejima

    (Bank of Japan)

  • Tokiko Shimizu

    (Bank of Japan)

Abstract

Enhancing market liquidity and efficiency in government bond markets is a central issue which needs to be addressed so as to ensure that the yield curve, which acts as the benchmark for yen interest rate instruments, is smoothly determined and reflects prevailing market prices. An efficient government bond market is indispensable from the standpoint of financial policy operations in order (1) to secure reliable information which reflects market participants' outlook on interest rates, and (2) to carry out smooth market operations using government bonds. However, there are various problems with respect to the government bond markets, related to both market structure and the behavior of market participants, and thus they are vulnerable to stress. The experience of summer 1999, where a widespread decline in market liquidity was observed in the government bond markets prompted in part by a shock which materialized in the repo market, is still fresh in our minds. In this paper, we explore various developments in Japanese government bond markets, focusing on the connection between the behavior and incentives of market participants and the effect they have had on market liquidity. More specifically, we examine the various problems (pricing difficulties and the impact on earnings, for example) faced by market participants and the accompanying decline in the market making activities, based on quantitative analysis and the results of questionnaire and interviews conducted by the Financial Markets Department.

Suggested Citation

  • Yosuke Shigemi & Sotaro Kato & Yutaka Soejima & Tokiko Shimizu, 2001. "Market Participants' Behavior and Pricing Mechanisms in the JGB Markets -- Analysis of Market Developments from the End of 1998 to 1999 --," Bank of Japan Working Paper Series Financial Markets Departm, Bank of Japan.
    • Handle: RePEc:boj:bojwps:01-e-1f
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    References listed on IDEAS

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    1. Bank for International Settlements, 1999. "Recommendations for the design of liquid markets," CGFS Papers, Bank for International Settlements, number 13, december.
    2. Bank for International Settlements, 1999. "Market Liquidity: Research Findings and Selected Policy Implications," CGFS Papers, Bank for International Settlements, number 11, december.
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    Cited by:

    1. Naohiko Baba & Yasunari Inamura, 2002. "The Japanese Repo Market: Theory and Evidence," Bank of Japan Working Paper Series Financial Markets Departm, Bank of Japan.
    2. Baba, Naohiko & Inamura, Yasunari, 2004. "The Japanese Repo Market: Theory and Evidence," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(1), pages 65-90, March.
    3. Hanabusa, Kunihiro, 2017. "Japan’s quantitative monetary easing policy: Effect on the level and volatility of yield spreads," Journal of Asian Economics, Elsevier, vol. 53(C), pages 56-66.

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