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Working Paper
Inflation Expectations, Liquidity Premia and Global Spillovers in Japanese Bond Markets
Using a novel arbitrage-free dynamic term structure model of nominal and real yields, we account for liquidity premia and the deflation protection afforded by Japanese inflation-indexed bonds, known as JGBi’s. Adjusting for time-varying JGBi liquidity premia lowers the estimated value of JGBi deflation protection and raises inflation risk premium estimates, while long-term Japanese inflation expectations remain relatively stable at levels modestly exceeding one percent during the pandemic period. We then utilize our estimated liquidity measure to document statistically significant ...
Working Paper
Central Bank Credibility During COVID-19: Evidence from Japan
Japanese realized and expected inflation has been below the Bank of Japan’s two percent target for many years. We examine the impact of announcements of expansionary monetary and fiscal policy under COVID-19 on inflation expectations from an arbitrage-free term structure model of nominal and real yields. We find that both types of policies failed to lift inflation expectations, which instead declined notably over the pandemic period and are projected to only slowly revert back to Bank of Japan target levels. Our results therefore illustrate the challenges faced in raising well-anchored low ...