Shinobu Jan 1010

Long-term Interest Rate in Japan :Past and recent developments and its outlook

Shinobu Nakagawa

Associate Director-General Center for Monetary Cooperation in Asia(CeMCoA) International Department Bank of Japan

%

10

US

Germany

6 2

4

2

0

J-08 F-08 M-08 A-08 M-08 J-08 J-08 A-08 S-08 O-08 N-08 D-08 J-09 F-09 M-09 A-09 M-09 J-09 J-09 A-09 S-09 O-09 N-09 D-09

J-09

J-08

J-07

J-06

8

J-05

J-04

J-03

J-02

J-01

J-00

J-99

J-98

J-97

J-96

J-95

J-94

J-93

J-92

J-91

J-90

J-89

J-88

J-87

J-86

12

J-85

2

10-year government bond yield 5

%

4

Germany

3

Japan US

Japan 1

0

3

Determinants of long-term interest rate

 Monetary policy  Growth potential  Inflation expectation  Risk (or structural) factors

J-09

FRB

J-08

2

J-07

J-06

J-05

J-04

J-03

10

J-02

J-01

J-00

J-99

J-98

J-97

J-96

J-95

J-94

J-93

J-92

J-91

J-90

J-89

J-88

J-87

J-86

12

J-85

4

Monetary policy rate % Japan's Quantitative Easing period

8

ECB

6

4

BOJ

0

% 4

Germany

2

1

-2 J-08 F-08 M-08 A-08 M-08 J-08 J-08 A-08 S-08 O-08 N-08 D-08 J-09 F-09 M-09 A-09 M-09 J-09 J-09 A-09 S-09 O-09 N-09 D-09

J-09

J-08

J-07

J-06

J-05

J-04

J-03

J-02

J-01

J-00

J-99

Japan

J-98

J-97

J-96

US

J-95

4

J-94

J-93

J-92

J-91

J-90

J-89

J-88

J-87

J-86

5

J-85

5

Yield spread 10 year government bond yield ― policy rate % Germany

US Japan

3

3

2

1

0

0

-1

-1

6

Growth potential Percentage change from previous period

Potential GDP

Labor force

Average 1998-2007

2008

Average 1998-2007

2008

Canada

2.9

2.2

1.8

1.7

France

2.0

1.7

0.7

0.7

Germany

1.2

1.2

0.4

0.2

Italy

1.2

1.1

0.8

1.5

Japan

0.9

0.5

-0.2

-0.3

United Kingdom

2.7

2.3

0.9

1.1

United States

2.8

2.3

1.2

0.8

(Source) OECD Economic Outlook

%

headline core

7 6 5 4 3 2 1 0 -1 -2 -3 Jan-85 Aug-86 Mar-88 Oct-89 May-91 Nov-92 Jun-94 Jan-96 Aug-97 Mar-99 Oct-00 May-02 Nov-03 Jun-05 Jan-07 Aug-08

7 6 5 4 3 2 1 0 -1 -2 -3 Jan-85 Nov-86 Sep-88 Jul-90 May-92 Mar-94 Jan-96 Nov-97 Sep-99 Jul-01 May-03 Mar-05 Jan-07 Nov-08

7

Inflation expectation

i) CPI Japan U.S.

%

headline core

Note: TIPS has not been issued since July 2008 in Japan.

O-09

J-09

A-09

J-09

O-08

J-08

A-08

J-08

3

O-07

-1

J-07

A-07

J-07

O-06

J-06

A-06

J-06

O-05

J-05

A-05

J-05

O-04

J-04

A-04

J-04

O-03

J-03

A-03

J-03

O-02

J-02

A-02

J-02

O-01

J-01

A-01

J-01

O-00

J-00

A-00

4

J-00

8

Inflation expectation

ii) Break-even inflation rate % US

2

1

0

Japan

-2

-3

-4

9

Inflation expectation iii) Survey results for Japan

10

Risk (or structural) factors

 Debt burden  Home bias  Bank balance sheet

11

Debt burden General government gross financial liabilities 250

Nominal GDP ratio, % OECD Forecast

200

Canada France

150

Germany Italy

Japan

100

UK US

50

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(Source) OECD Economic Outlook

12

Home bias Share of JGBs held by overseas

Share of JGBs holders As of end-Dec. 2008 Overseas 7%

%

Others Households 4% 5%

8 7

Public Pension 12%

6 BOJ 8%

5 4 3

Financial Institutions 64%

2 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

2004

2005

2006

2007

Share of government bonds held by overseas

overseas

Japan (Dec.2008)

US (Dec.2008)

UK (Dec.2008)

Germany (Sep.2008)

France (Dec.2008)

6.8%

50.3%

36.5%

52.6%

33.8%

2008

13

Japanese banks’ balance sheet Loan-deposit ratio %

10

%

Deposit interest rates

4

%

8

100

6

95

3

deposit

4

time deposit(averaged)

2

90

2

0 85

-2

ordinary deposit(averaged)

-4

80

1

-6 loan

-8

2008

2006

2004

2002

2000

1998

1996

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

2008

2006

2004

2002

2000

1998

1996

1994

1992

1994

0

-10 1990

70

1992

75

1990

105

Growth in loans and deposits

14

Net financial assets by economic agent in Japan nominal GDP ratio, %

nominal GDP ratio, %

250

250

200

200

150

150

Households 100

Gross assets

100

Domestic sector

Overseas' net financial assets

50

50

0

0

General governmnet -50

-50

-100

-100

Gross liabilities -150 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-150

Non-financial private corporations

15

Concluding remarks ● Although its debt burden has been growing considerably, long- term interest rate in Japan has been very low because of : 

Very accommodative monetary policy, including quantitative easing



Low growth potential



Low inflation expectation



Home bias by Japanese financial institutions, particularly banks

● What banks have been facing includes : 

Decline in loan demand



Continued deposit inflows despite of almost zero interest rates



Government bonds to be major investment assets

● Outlook for long-term interest rate : 

Upward pressure owing to growing debt burden



Can we say, as long as household saving is larger than other sectors’ liability, such

pressure continued to be significantly mitigated?