What are Japanese Government Bonds (JGB)?
Japanese Government Bond (JGB) is a bond issued by the government of Japan. The government pays interest on the bond until the maturity date. On the maturity date, the full price of the bond is returned to the bondholder. Japanese government bonds play a key role in the financial stock market in Japan.
- Japanese government bonds (JGB) are bonds issued by the Japanese government and have become a key part of the country’s central bank’s efforts to boost inflation.
- There are three key types of JGB: general bonds, Fiscal Investment Program bonds and Loans, and subsidy bonds.
- JGBs are similar to US Treasuries in that they are backed by the federal government and are low risk.
Understanding Japanese Government Bonds (JGB)
Japanese government bonds (JGB) have various maturities ranging from 2 years to 40 years. Fixed coupon payments are determined at the time of issuance and are paid semi-annually until the maturity of the security.
There are four types of Japanese government bonds (JGB):
- General bonds, such as construction bonds and debt financing bonds.
- Bonds of the Fiscal Loan and Investment Program (FILP), which can be used to raise funds for the investment of the Fiscal Loan Fund.
- Reconstruction bonds.
- Bonus repayment.
In recent years there has been a decrease in liquidity in the JGB market due to aggressive monetary actions by the central bank, the Bank of Japan (BoJ). Since 2013, the Bank of Japan has been buying billions of dollars in Japanese government bonds, flooding the economy with cash in an effort to drive the country’s low annual inflation rate toward its 2% target while maintaining interest rates. in the long term around 0.%. To keep the 10-year JGB yield at zero, an increase in the yield on these bonds triggers a buying action by the BoJ.
As of 2019, the central bank owns more than 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. The strong purchase of JGB increases the demand for bonds, which leads to an increase in the price of the bonds. Rising prices force bond yields down, an essential element of the central bank’s ultrafast yield curve (YCC) control policy, which was designed to help increase the profits that Japanese banks could make by trading. lend money.
The Bank of Japan implemented yield curve control in 2016 in an effort to keep its 10-year JGB yield at zero and to steepen the yield curve. The yield curve steepens as the spread between short-term interest rates, which are negative in Japan, and long-term rates increases. The wider interest rate differential creates opportunities to arbitrate earnings, which is advantageous for banks in Japan.
Japanese Government Bonds (JGB) vs. US Treasury Bonds.
Japanese Government Bonds (JGBs) closely resemble US Treasuries.They are fully backed by the Japanese government, making them a very popular investment among low-risk investors and a useful investment among investors. high-risk investors as a way to balance the risk factor of their portfolios. Like US savings bonds, they have high levels of credit and liquidity, further increasing their popularity. In addition, the price and yield at which the JGB are traded are used as a benchmark against which other riskier debt in the country is valued.