Does the Japanese Financial Market Believe in Fiscal Sustainability?: Analysis of the Market for the JGB Futures Options

Public Policy Review, 2021, vol. 17, issue 2, 1-33

Abstract: In recent years, although alarms have been sounded over an imminent fiscal crisis in Japan, yields on the Japanese Government Bond (hereafter JGB) have stayed stable at low levels. Does this mean that, in the private sector, there is no concern over fiscal sustainability? This paper analyzes prices of the JGB futures options in order to obtain information on private-sector perceptions on the future course of the JGB market. The results show that monetary policy plays a decisive role in the movements of prices of the JGB futures options. In particular, since the introduction of the yield curve control in 2016, options trading itself has remained sluggish. This paper analyzes how the market has reacted to some particular “fiscal news events,” namely newsworthy incidents that may have had a significant impact on the expected future course of the fiscal deficit. We do not find any clear evidence that concerns over the deficit have been factored into asset price formation.

Keywords: government bond futures options; volatility smile; fiscal policy; monetary policy; yield curve control (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:mof:journl:ppr17_02_03

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