The Impact of Long-term Cross-currency Basis Swap on Japanese Government Bonds: Analysis of Different Non-traditional Monetary Policy Regimes

Abstract

A cheaper yen gives foreign investors strong incentives to buy Japanese Government Bonds (JGBs) of 5 and 10 years under the comprehensive easing policy regime. The purchase of JGBs by foreign investors using a cheaper yen funded on a negative basis in the long-term basis swap market contributes to the declining yield of JGBs under the comprehensive easing policy regime. When the Bank of Japan introduced a quantitative and qualitative easing policy, and then a negative interest rate policy, the trend observed under the comprehensive easing policy changed. This was because long-term basis swap rate tended not to decline under the quantitative and qualitative easing policy and negative interest rate policy regimes in comparison with under the comprehensive easing policy regime.

Citation

Ito, T. (2022), "The Impact of Long-term Cross-currency Basis Swap on Japanese Government Bonds: Analysis of Different Non-traditional Monetary Policy Regimes", Barnett, W.A. and Sergi, B.S. (Ed.) Quantitative Analysis of Social and Financial Market Development (International Symposia in Economic Theory and Econometrics, Vol. 30), Emerald Publishing Limited, Leeds, pp. 35-46. https://doi.org/10.1108/S1571-038620220000030003