Outlook for Interest Rates and Japanese Banks’ Risk Exposures under Abenomics

Author/Editor:

Serkan Arslanalp ; Waikei R Lam

Publication Date:

October 18, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines how Japan’s long-term interest rates and Japanese banks’ interest rate risk exposures may evolve under Abenomics. Results from a panel regression analysis for major advanced economies shows that long-term government bond yields in Japan are determined to a large extent by growth and inflation outlook, fiscal conditions, demography, and the investor base of government securities. A further deterioration of fiscal conditions would push up long-term rates by about 2 percentage points over the medium term, but the rise is partly offset by higher demand for safe assets amid population aging and increased purchases by the Bank of Japan. At the same time, illustrative scenarios suggest the interest rate risk exposure of Japanese banks could decline substantially over the next two years. However, if structural and fiscal reforms are incomplete, both long-tem yields and interest-risk exposures of Japanese banks could increase over the medium term.

Series:

Working Paper No. 13/213

Subject:

English

Publication Date:

October 18, 2013

ISBN/ISSN:

9781484374214/1018-5941

Stock No:

WPIEA2013213

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

26

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