What is a Japanese Government Bond (JGB)?
A Japanese Government Bond, or JGB, is a bond that the Japanese government has put out. The government gives the loan interest until the due date. The bondholder returns the total amount of the bond’s value on the date it matures. Japanese government bonds are an essential part of Japan’s market for financial assets.
How to Understand Japanese Government Bonds
Japanese government bonds, or JGBs, have terms that range from 2 to 40 years. Fixed coupon payments are set when the security is issued and are made every six months until the security matures.
Japan’s government bonds, or JGBs, come in four types:
- There are different kinds of bonds, like building bonds and loan-financing bonds.
- Issuers of Fiscal Investment and Loan Program (FILP) bonds can raise money to put in the Fiscal Loan Fund.
- Bonds for reconstruction.
- I am giving back bonds.
Unique Things to Think About
In the past few years, the solid monetary policies of Japan’s central bank, the Bank of Japan (BoJ), have caused the JGB market to lose liquidity. The Bank of Japan started buying billions of dollars worth of Japanese government bonds in 2013. This pumped cash into the economy to raise the country’s low annual inflation rate to its goal level of 2%. The BoJ buys these bonds when their yield increases, so the yield on ten-year JGBs stays close to zero.
The central bank owns more than 48% of Japanese government bonds as of 2020. Supply and demand in the markets determine the direction of the link between interest rates and bond prices. When people buy a lot of JGBs, the demand for the bonds goes up, which increases the bond price. The rise in price pushes down the bond yield, which is an integral part of the central bank’s ultra-loose yield curve control (YCC) policy. This policy was made to help Japanese banks make more money by giving money.
In 2016, the Bank of Japan implemented yield curve control to keep the yield on its ten-year JGB at zero and make the yield curve steeper. The yield curve gets steeper when the difference between long-term and short-term interest rates increases. In Japan, the difference is negative for short-term rates. The more significant difference in interest rates makes it possible to trade gains, which is suitable for Japanese banks.
In 2021, the Bank of Japan stopped buying as many monthly bonds and started reporting purchases every three months instead. According to reports, this happened because the policy of firmly aiming for 0% yields had stopped trade in the bond market. The bank wanted more people to trade on the bond market by stepping back from it.
Japanese government bonds (JGBs) vs. U.S. government bonds
Japanese government bonds, or JGBs, are much like U.S. Treasury bonds. The Japanese government fully backs them, which makes them a popular investment for people who don’t want to take too many risks. High-risk investors can also use them to balance the risk in their portfolios. They are trendy because, like U.S. savings bonds, they have a lot of credit and are easy to cash in. Another thing is that the price and yield of JGBs are used to compare the value of other risky loans in the country.
Conclusion
- Japanese government bonds, or JGBs, are bonds that the Japanese government issues. They are a big part of the central bank’s plan to raise inflation in Japan.
- Japan’s government bonds come in three main types: general bonds, fiscal investment and loan program bonds, and support bonds.
- It’s like U.S. Treasury bonds because JGBs are low-risk and backed by the government.
