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?