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Outlook for Interest Rates and Japanese Banks’ Risk Exposures under Abenomics

  • Serkan Arslanalp
  • Raphael W. Lam
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    This paper examines how Japan’s long-term interest rates and Japanese banks’ interest rate risk exposures may evolve under Abenomics. Results from a panel regression analysis for major advanced economies shows that long-term government bond yields in Japan are determined to a large extent by growth and inflation outlook, fiscal conditions, demography, and the investor base of government securities. A further deterioration of fiscal conditions would push up long-term rates by about 2 percentage points over the medium term, but the rise is partly offset by higher demand for safe assets amid population aging and increased purchases by the Bank of Japan. At the same time, illustrative scenarios suggest the interest rate risk exposure of Japanese banks could decline substantially over the next two years. However, if structural and fiscal reforms are incomplete, both long-tem yields and interest-risk exposures of Japanese banks could increase over the medium term.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/213.

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    Length: 26
    Date of creation: 18 Oct 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/213
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    1. Takeo Hoshi & Takatoshi Ito, 2012. "Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?," NBER Working Papers 18287, National Bureau of Economic Research, Inc.
    2. Waikei Raphael Lam & Kiichi Tokuoka, 2013. "Assessing The Risks To The Japanese Government Bond Market," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1350002-1-1.
    3. C. Emre Alper & Lorenzo Forni, 2011. "Public Debt in Advanced Economies and its Spillover Effectson Long-Term Yields," IMF Working Papers 11/210, International Monetary Fund.
    4. R. Glenn Hubbard & Eric M. Engen, 2004. "Federal Government Debt and Interest Rates," Working Papers 50018, American Enterprise Institute.
    5. Jochen R. Andritzky, 2012. "Government Bonds and their Investors: What Are the Facts and Do they Matter?," IMF Working Papers 12/158, International Monetary Fund.
    6. Eric M. Engen & R. Glenn Hubbard, 2004. "Federal Government Debt and Interest Rates," NBER Working Papers 10681, National Bureau of Economic Research, Inc.
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