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
2
10-year government bond yield
3
Determinants of long-term interest rate
Monetary policy Growth potential Inflation expectation Risk (or structural) factors
FRB
J-0 9
J-0 8
2
J-0 7
J-0 6
J-0 5
J-0 4
J-0 3
10
J-0 2
J-0 1
J-0 0
J-9 9
J-9 8
J-9 7
J-9 6
J-9 5
J-9 4
J-9 3
J-9 2
J-9 1
J-9 0
J-8 9
J-8 8
J-8 7
J-8 6
12
J-8 5
4
Monetary policy rate % Japan's Quantitative Easing period
8
ECB
6
4
BOJ
0
4
% 4
US Japan 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
5
J-85 J-86 J-87 J-88 J-89 J-90 J-91 J-92 J-93 J-94 J-95 J-96 J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09
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
7
Inflation expectation i) CPI Japan
U.S.
8
Inflation expectation ii) Break-even inflation rate
Note: TIPS has not been issued since July 2008 in Japan.
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
(Source) OECD Economic Outlook
12
Home bias Share of JGBs held by overseas
Share of JGBs holders As of end-Dec. 2008
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%
13
Japanese banks’ balance sheet Loan-deposit ratio
Growth in loans and deposits
Deposit interest rates
14
Net financial assets by economic agent in Japan nominal GDP ratio, %
nominal GDP ratio, %
250
250
200
200
150
150
Households 100 50
Gross assets
100
Domestic sector 50
0
Overseas' net financial assets
0
General governmnet -50
-100
-100
1 0 9 9 1 2 9 1 3 9 1 4 9 1 5 9 1 6 9 1 7 9 1 8 9 1 9 1 0 2 1 0 2 0 2 3 0 2 4 0 2 5 0 2 6 0 2 7 0 2 8 0 2
-150
Non-financial private corporations
-150
Gross liabilities
1 0 9 9 1 2 9 1 3 9 1 4 9 1 5 9 1 6 9 1 7 9 1 8 9 1 9 1 0 2 1 0 2 0 2 3 0 2 4 0 2 5 0 2 6 0 2 7 0 2 8 0 2
-50
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