No-arbitrage Determinants of Japanese Government Bond Yield and Credit Spread Curves

We introduce an affine term structure model with observed macroeconomic factors for the government bond yield and credit spread curves. Empirical results based on the model selection using Japanese data demonstrate that the government bond yield and credit spread curves are dominated by monetary policy and suggest that the flight-to-quality behavior considerably affects the government bond yield. In addition, our results indicate that global economic forces, such as the U.S. Treasury yield and Baa-Aaa credit spread, play a major role in the joint dynamics of government yield and credit spread curves, complementing a growing body of literature explaining what drives the yield and credit spread curves. Our contemporaneous response and historical decomposition analyses find that monetary policy and global economic and financial forces have large impacts on all maturities and curves.