Japanese Government Bond (JGB)

What Is a Japanese Government Bond (JGB)?

A Japanese Government Bond (JGB) is a bond issued by the government of Japan. The government pays interest on the bond until the maturity date. At the maturity date, the full price of the bond is returned to the bondholder. Japanese government bonds play a key job in the financial securities market in Japan.

Understanding Japanese Government Bonds (JGBs)

Japanese government bonds (JGBs) have different maturities going from 2 years to 40 years. Fixed coupon payments are determined at the hour of issuance and are paid on a semi-annual basis until the security develops.

There are four sorts of Japanese government bonds (JGBs):

1. General bonds, for example, construction bonds and debt financing bonds.
2. Fiscal Investment and Loan Program (FILP) bonds, which can be utilized to raise funds for the investment of the Fiscal Loan Fund.
3. Reconstruction bonds.
4. Refunding bonds.

Special Considerations

A decline in liquidity in the JGB market has been seen in recent years due to the aggressive monetary actions of the central bank — the Bank of Japan (BoJ). In 2013, the Bank of Japan started buying up billions of dollars of Japanese government bonds, flooding the economy with cash with an end goal to impel the country's low annual inflation rate toward its 2% target. To keep the yield on ten-year JGBs close to zero, a rise in the yield of these bonds sets off a buy action from the BoJ.

Starting around 2020, the central bank possesses more than 48% of Japanese government bonds. There is an inverse relationship between interest rates and bond prices, which are directed by supply and demand in the markets. Heavy buying of JGBs increases the demand for the bonds, which prompts an increase in the price of the bonds. The price increase powers down the bond yield, an essential element of the central bank's super free yield curve control (YCC) policy, which was intended to assist with expanding the profits that Japanese banks could earn from lending money.

The Bank of Japan executed the yield curve control in 2016 with an end goal to keep the yield on its ten-year JGB at zero and to steepen the yield curve. The yield curve steepens when the spread between short-term interest rates, which are negative in Japan, and long-term rates increase. The more extensive spread in interest rates sets out open doors to arbitrage profits, which is worthwhile for banks in Japan.

In 2021, the Bank of Japan decreased its bond-buying and started declaring purchases on a quarterly, as opposed to a month to month, schedule. Supposedly this happened in light of the fact that the policy of aggressively targeting 0% yields had prompted stale trading in the bond market. By decreasing intervention in the bond market, the bank expected to energize more active trading.

Japanese Government Bonds (JGBs) versus U.S. Treasuries

Japanese government bonds (JGBs) are actually similar to U.S. Treasury securities. They are fully backed by the Japanese government, making them an exceptionally famous investment among low-risk investors and a valuable investment among high-risk investors as a method for adjusting the risk factor of their portfolios. Like U.S. savings bonds, they have high levels of credit and liquidity, which further adds to their prevalence. Moreover, the price and yield at which JGBs trade is utilized as a benchmark against which other, riskier debt in the country is valued.

Highlights

• Japanese government bonds (JGBs) are bonds issued by the Japanese government and have turned into a key part of the country's central bank efforts to help inflation.
• JGBs are like U.S. Treasuries in that they are backed by the national government and low-risk.
• There are three key types of JGBs — general bonds, Fiscal Investment and Loan Program bonds, and subsidy bonds.