What Are Japanese Government Bonds?

Japanese Government Bond (JGB) is a bond issued by the government of Japan. The government pays interest on the bond until the maturity date. At the maturity date, the full price of the bond is returned to the bondholder. Japanese government bonds play a key role in the financial securities market in Japan.

Understanding Japanese Government Bond (JGB)

There are three kinds of Japanese government bonds offered – (1) General bonds, such as construction bonds and debt financing bonds; (2) Fiscal Investment and Loan Program (FILP) bonds used to raise funds for the investment of the Fiscal Loan Fund; and (3) Subsidy bonds. Japanese government bonds (JGBs) have various maturities ranging from 6 months to 40 years. Its short-term bonds with 1 year or less maturity dates are issued at a discount to par and are structured as zero-coupon bonds. However, at maturity, the value of the bond can be redeemed at its full face value. Its medium- to long-term bonds have fixed coupon payments, which are determined at the time of issuance and are paid on a semi-annual basis until the security matures.

Japanese government bonds (JGBs) are very much like U.S. Treasury securities. They are fully backed by the Japanese government, making them a very popular investment among low-risk investors and a useful investment among high-risk investors as a way to balance the risk factor of their portfolios. Like U.S. savings bonds, they have high levels of credit and liquidity, which further adds to their popularity. Furthermore, the price and yield at which JGBs trade are used as a benchmark against which other riskier debt in the country is valued.

A decline in liquidity in the JGB market has been observed in recent years due to the aggressive monetary actions of the central bank, The Bank of Japan (BoJ). Since 2013, the Bank of Japan has been buying up billions of dollars of Japanese government bonds, flooding the economy with cash in an effort to propel the country’s low annual inflation rate toward its 2% target by keeping long-term interest rates at around 0%. To maintain the yield on 10-year JGBs at zero, a rise in the yield of these bonds, triggers a buy action from the BoJ. As of 2017, the central bank held 40% of Japanese government bonds. There is an inverse relationship between interest rates and bond prices, which are dictated by supply and demand in the markets. Heavy buying of JGBs increases demand for the bonds, which leads to an increase in the price of the bonds. The price increase forces down the bond yield, an essential element of the central bank’s ultra-loose yield curve control (YCC) policy, which was designed to help increase the profits that Japanese banks could earn from lending money.

The Bank of Japan implemented the yield curve control in 2016 in an effort to keep the yield on its 10-year JGB at zero and to steepen the yield curve. The yield curve steepens when the spread between short-term interest rates, which are negative in Japan, and long term rates increase. The wider spread in interest rates creates opportunities to arbitrage profits, which is advantageous for banks in Japan.