Assessing Abenomics: Evidence from Inflation-Indexed Japanese Government Bonds

Jens Christensen and Mark Spiegel

No 2019-15, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We assess the impact of news concerning the reforms associated with ?Abenomics? using an arbitrage-free term structure model of nominal and real yields. Our model explicitly accounts for the deflation protection enhancement embedded in Japanese inflation-indexed bonds issued since 2013, which pay their original nominal principal when deflation has occurred from issue to maturity. The value of this enhancement is sizable and time-varying, with substantive impacts on estimates of expected inflation compensation. After properly accounting for deflation protection, our results suggest that Japanese inflation risk premia were mostly negative during this period. Moreover, long-term inflation expectations remained positive throughout, despite extensive spells of realized deflation. Finally, initial market responses to policy changes associated with Abenomics and afterwards were not as inflationary as they appear under standard modeling procedures, implying that the program was less ?disappointing? than many perceive.

Keywords: Japan; affine arbitrage-free term structure model; unconventional monetary policy; deflation; inflation expectations (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 G12 G17 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2019-10-15
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-ore
Note: The original version of this Working Paper was published May 7, 2019.
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Citations: View citations in EconPapers (1)

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DOI: 10.24148/wp2019-15

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