Long‐term interest rates under negative interest rate policy: Analysis of Japanese government bond and swap markets

• Date: 01 January 2020
• Author: Takayasu Ito
• Published date: 01 January 2020
• DOI: http://doi.org/10.1002/jcaf.22410

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Long-term interest rates under negative interest rate policy:

Analysis of Japanese government bond and swap markets

Takayasu Ito

School of Commerce, Meiji University,

Tokyo, Japan

Correspondence

Takayasu Ito, School of Commerce, Meiji

University, Tokyo, Japan.

Email: tito747@meiji.ac.jp

Funding information

Japan Society for the Promotion of Science,

Grant/Award Number: 18K01709

Abstract

Market segmentation is observed in the Japanese government bond (JGB) and swap

markets of 2-, 3-, 4-, 5-, 7-, and 10-year maturities under negative interest rate policy

regime. This also means that the arbitrage between the JGB and swap markets does

not work in these maturities. After the Bank ofJapan introduces a yield curve control

policy under negative interest rate policy, market segmentation is observed only in

the JGB and swap markets of 7- and 10-year maturities. In the maturities of 2, 3,

4, and 5 years, the JGB yield and the swap rate co-move. The market function

recovers and arbitrage works between the JGBand swap markets in these maturities.

KEYWORDS

interest rate swap, Japanese government bond, market segmentation, negative interest rate policy,

yield curve control

1|INTRODUCTION

The Bank of Japan (BOJ) introduces “a quantitative and

qualitative easing policy with a negative interest rate”on

January 29, 2016. It introduces a negative interest rate while

maintaining the framework of the quantitative and qualita-

tive easing policy. The operating target is both the interest

rate and the monetary base. “The BOJ applies a negative

interest rate of −0.1% to the policy-rate balances in current

accounts held by financial institutions at the Bank”. It intro-

duces “a yield curve control (YCC) policy”on September

21, 2016. “In addition to maintaining a −0.1% to the policy-

rate balances, it purchases Japanese government bonds

(JGBs) so that the 10-year JGB yields remains more or less

at the current level (around 0%).”

This article focuses on the co-movement between the

JGB yield and the interest rate swap (hereinafter swap) rate

in Japan in the negative interest rate period. In the analysis,

the whole sample period is divided into two depending on

monetary policy regimes. By doing this, it might be possible

to investigate the asymmetrical impact of different monetary

policy regimes on long-term interest rates.

In this article, the co-integration approach is used to ana-

lyze the co-movement between the JGB yield and the swap

rate. This approach has never been used in the analysis of

the JGB and swap markets except for in Ito (2009). Morris,

Neal, and Rolph (1998) use it to analyze the relationship

between the U.S. government securities and the corporate

bonds. This approach enables us to know if the swap rates

are in long-run equilibrium with the JGB yields in the

corresponding term.

Ito (2009) uses this method for an analysis of the JGB

and swap markets. In Ito's (2009) study, “the whole sample

is divided into two sub-periods: Sample A is from January

4, 1994 through to February 12, 1999; Sample B is from

February 15, 1999 through to February 27, 2009.”In

Sample A, “the Japanese swap rates are in long-run equilib-

rium with the JGB yields in all maturities.”In Sample B,

“the Japanese swap rates are in long-run equilibrium with

the JGB yields only in the maturities of 4 years, 5 years, and

7 years and market segmentation between the JGB and Japa-

nese swap markets is observed in the maturities of two years,

three years, and 10 years”.

Related studies, such as Andresen, Kristoffersen, and

Risbjerg (2015), Jackson (2015), Arteta, Kose, Stocker, and

Received: 30 June 2019 Accepted: 17 July 2019

DOI: 10.1002/jcaf.22410

12 © 2019 Wiley Periodicals, Inc. J Corp Acct Fin. 2020;31:12–17.wileyonlinelibrary.com/journal/jcaf