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Working Paper No. 938 | October 2019

The Impact of the Bank of Japan’s Monetary Policy on Japanese Government Bonds’ Low Nominal Yields

Nominal yields for Japanese government bonds (JGBs) have been remarkably low for several decades. Japanese government debt ratios have continued to increase amid a protracted period of stagnant nominal GDP, low inflation, and deflationary pressures. Many analysts are puzzled by the phenomenon of JGBs’ low nominal yields because Japanese government debt ratios are elevated. However, this paper shows that the Bank of Japan’s (BoJ) highly accommodative monetary policy is primarily responsible for keeping JGB yields low for a protracted period. This is consistent with Keynes’s view that the short-term interest rate is the key driver of the long-term interest rate. This paper also relates the BoJ’s monetary policy and economic developments in Japan to the evolution of JGBs’ long-term interest rates.

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