Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5086148 | Japan and the World Economy | 2012 | 8 Pages |
The Japanese government is heavily indebted but the yield on the Japanese government bond (JBG) remains low to date. We hypothesize that the presence of the Japanese government as a large stable investor of JGBs exerted a stabilizing influence on private JGB traders and thus rendered the risk premium for sovereign default negligible. To identify the influence of a large stable JGB holder, we utilize a surprise change in the policy stance toward public debt holding as a quasi-experiment. We estimated a VARMA model using daily data and found that an announced government withdrawal led to a 50-basis-point increase in the yields of 10-year JGBs. Our study suggests that large public debt holding reduces the risk premium and is one factor behind the low yield.
⺠The Japanese public sector holds 45.7 percent of outstanding public debts in 2008. ⺠The large public holding of public debts reduces the sovereign risk premium. ⺠A large stable holding prevents the coordination problem faced by investors.