JGB Yield Curve and Macro-Financial Stability: ow Would a Steeper JGB Yield Curve Affect Bank Profitability? Japan

Given that there is exceptionally high uncertainty around the domestic inflation outlook, allowing for greater flexibility in long-term Japanese Government Bond (JGB) yields by the Bank of Japan (BoJ) could be considered going forward.
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Volume/Issue: Volume 2023 Issue 032
Publication date: May 2023
ISBN: 9798400244032
$15.00
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Topics covered in this book

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Banks and Banking , Finance , Money and Monetary Policy , International - Economics , JGB yield curve , long-term Japanese Government Bond , yield curve slope , macro-Financial stability , yield curve flattening , Yield curve , Bank soundness , Global

Summary

Given that there is exceptionally high uncertainty around the domestic inflation outlook, allowing for greater flexibility in long-term Japanese Government Bond (JGB) yields by the Bank of Japan (BoJ) could be considered going forward. Against this background, this study empirically finds that a steeper JGB yield curve helps improve banks’ profitability, especially after a year lag, and the overall impact hinges on macroeconomic and financial market responses. A steeper JGB yield curve could also have spillovers on global yields. Financial sector policies to mitigate short-term vulnerabilities in case the JGB yield curve steepens could be considered, including by further strengthening engagement with financial institutions with relatively high exposure to interest rate movements, to better harness the benefits in the medium term.