Japanese Government Bonds (JGBs): Securing Future Investments
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 which point the full principal is returned to the bondholder. Japanese government bonds play a key role in the financial securities market in Japan.
Key Highlights
- Stable Investment: Japanese government bonds (JGBs) are issued by the Japanese government and are a crucial part of the country’s central bank efforts to manage inflation.
- Variety of Bonds: There are three key types of JGBs: general bonds, Fiscal Investment and Loan Program (FILP) bonds, and subsidy bonds.
- Safe and Secure: Similar to U.S. Treasuries, JGBs are backed by the national government and are considered low-risk.
Delving into Japanese Government Bonds (JGBs)
Japanese government bonds (JGBs) offer varied maturities ranging from 2 to 40 years. Fixed coupon payments, determined at the time of issuance, are paid semi-annually until the bond matures.
Types of Japanese Government Bonds:
- General bonds, including construction bonds and debt financing bonds.
- Fiscal Investment and Loan Program (FILP) bonds, meant to raise funds for the investment of the Fiscal Loan Fund.
- Reconstruction bonds.
- Refunding bonds.
Factors to Consider
Recent years have witnessed a decline in liquidity in the JGB market, attributed to the aggressive monetary actions of the central bank, the Bank of Japan (BoJ). In 2013, the Bank of Japan commenced purchasing large quantities of JGBs, injecting cash into the economy to achieve a 2% annual inflation target. A rise in JGB yields typically prompts the BoJ to initiate bond purchases, aiming to keep the yield on ten-year JGBs close to zero.
As of 2020, the central bank owns over 48% of JGBs. The bond prices and yields are framed by supply and demand dynamics. Heavy buying increases demand, raising the bond price and reducing its yield—a vital aspect of the Bank of Japan’s yield curve control (YCC) policy, introduced in 2016. This policy seeks to maintain long-term bond yields and provide opportunities for arbitrage profit for banks.
In 2021, to counteract stagnant trading, the BoJ shifted to a quarterly bond-buying announcement schedule, reducing intervention to foster active market trading.
Comparing Japanese Government Bonds (JGBs) with U.S. Treasuries
Japanese government bonds (JGBs) are akin to U.S. Treasury securities, being fully backed by their respective governments. This renders JGBs an attractive choice for low-risk investors and a potential portfolio stabilizer for high-risk investors. Like U.S. savings bonds, JGBs are distinguished by high credit and liquidity, underscoring their popularity. Moreover, the trade price and yield of JGBs serve as benchmarks for evaluating riskier debt instruments in the country.
Related Terms: U.S. Treasuries, yield curve, central bank, inflation, bond market.
References
- Ministry of Finance, Japan. “About JGBs”.
- Ministry of Finance, Japan. “FY2020 JGB Issuance Plan”.
- Bank of Japan. “Monetary Policy”.
- Statista. “Distribution of Japanese Government Bond (JGB) Holders as of December 2020”.
- Reuters. “BOJ to Trim JGB Buying, Seen Taking More Hands-Off Approach”.
