Term Structure of Interest Rates under Zero or Low Bound: The Recent Japanese Case

This article examines the recent term structure of interest rates in Japan. No consensus has been reached on whether or not the yield curve can be asymmetric and can be an economic predictor, although much discussion has occurred. In Japan, the zero or low-bound interest rate policy and, after that, the quantitative easing policy was conducted to boost the economy since the end of 1990s. Recession and deflation have been ongoing for more than 20 years. The term structure of interest rates uses an unusual style compared to the normal structure, especially during zero or low-bound period, as interest rates in general tend not to be negative. Using empirical methods, this article shows that the term structure is a nonlinear relationship between short- and long-term rates during the zero or low-bound policy period in Japan. For the sensitivity of short-term yields to long-term interests, there is no evidence for symmetric response to positive and negative short-term rate change; however, and only during the zero or low-bound interest rate policy era, there is a symmetric response on longer-term interest rate. Moreover, the long-term yield spread is not a good predictor of recessions.