Low inflation, a high net savings surplus and institutional restrictions keep the Japanese long-term interest rate low

Pieter W. Jansen

Research output: Working paperProfessional

Abstract

This paper explains that the interest rate on long-term Japanese government bonds is low in comparison with other industrialised countries for four main reasons: lower inflation, net savings surplus, institutional restrictions and home bias. Monetary policy and institutionalised purchases of government bonds by semi-government agencies keep the market demand for bonds high. We find that since the 1970s Japanese interest rate movements are better explained by the current account balance than in other industrialised countries. This is caused by sizeable net oversavings and institutional reasons increased the impact of oversavings as such on the long-term interest rate for Japan. Hence, the institutional reasons increase the coefficient value of the savings-investment balance. A reason for the existence of the high national net savings surplus could be that unsustainable budgetary deficits in Japan called for a Ricardian response. We doubt whether Ricardian equivalence is here the driving factor: household savings have actually fallen over the nineties. Corporate savings, in response to overcapacity and poor investment outlook, have risen more strongly. This has kept the private and national savings balance positive. There is also some indication that ageing has contributed to the structural current account surplus for Japan.
Original languageEnglish
Place of PublicationAmsterdam
PublisherFaculty of Economics and Business Administration, Vrije Universiteit Amsterdam
Publication statusPublished - 2006

Publication series

NameResearch Memorandum
No.2006-11

Fingerprint

Japan
Savings
Surplus
Inflation
Long-term interest rates
Interest rates
Government bonds
Developed countries
Overcapacity
Factors
Purchase
Household saving
Saving-investment
Market demand
Coefficients
Government agencies
Monetary policy
Private savings
Home bias
Current account

Cite this

Jansen, P. W. (2006). Low inflation, a high net savings surplus and institutional restrictions keep the Japanese long-term interest rate low. (Research Memorandum; No. 2006-11). Amsterdam: Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam.
Jansen, Pieter W. / Low inflation, a high net savings surplus and institutional restrictions keep the Japanese long-term interest rate low. Amsterdam : Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, 2006. (Research Memorandum; 2006-11).
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Jansen, PW 2006 'Low inflation, a high net savings surplus and institutional restrictions keep the Japanese long-term interest rate low' Research Memorandum, no. 2006-11, Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, Amsterdam.

Low inflation, a high net savings surplus and institutional restrictions keep the Japanese long-term interest rate low. / Jansen, Pieter W.

Amsterdam : Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, 2006. (Research Memorandum; No. 2006-11).

Research output: Working paperProfessional

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Jansen PW. Low inflation, a high net savings surplus and institutional restrictions keep the Japanese long-term interest rate low. Amsterdam: Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam. 2006. (Research Memorandum; 2006-11).