The term structure of Japanese Government bonds in the super long term under different aspects of yield curve control

Abstract

Japanese Government Bonds (JGBs) increased in volatility after the Bank of Japan (BOJ) expanded the upper limit of the yield curve control (YCC) from .2% to .25% on March 19, 2021. The entire sample period is divided in half. The JGB yield curve from 20 to 40 years is driven by three common trends in the first half of the YCC. On the other hand, the JGB yield curve from 20 to 40 years is driven by two common trends in the second half. JGBs in the maturities of 20, 30, and 40 years move independently in the first half. On the other hand, the JGBs of 30 and 40 years move together in the second half. The maturities of 20, 30, and 40 years are segmented in the first half, but those of 30 and 40 years are integrated in the second half. The JGBs in the super long term began to recover their market function after the BOJ decided to move the upper limit of the YCC to .5%. The decision made by the BOJ contributed to rectifying the malfunctioning JGB market.