The Impact of Changes in JGB Yields on the Japanese Financial Institutions and the Real Economy: Simulation analysis using the Financial Macro-econometric Model

Author Name KAMADA Koichiro  (Bank of Japan) /KURACHI Yoshiyuki  (Bank of Japan)
Creation Date/NO. June 2012 12-J-021
Research Project Policy Mix for Fiscal Consolidation Without Harming Japan's Economic Recovery
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This paper analyzes the impact of an increase in Japanese government bonds (JGB) yields on the Japanese banks and the macro economy, based on the Financial Macro-econometric Model introduced by Ishikawa et al. (2011). When the yields on government bonds increase, banks incur unrealized losses in their bond holdings. The rise in government bonds yields also has a broad and recognizable impact on economic activities through an adverse feedback loop between the financial sector and the real economic sector. This paper simulates a situation in which the government bonds yields increase by one percentage point. According to the simulation results, the associated unrealized losses on bond holdings have only a limited impact on the Tier I ratio and would not substantially deteriorate the operations of the banking business. It should be noted, however, that the impact is lessened superficially by a number of "cushions," such as deferred tax assets and unrealized gains on bond holdings accumulated so far. This implies that as the rise in bond yields becomes larger, such cushion effects weaken relatively, and the impact of the yield change on the financial system and the real economy increases non-linearly.