Using a novel arbitrage-free dynamic term structure model of nominal and real yields, we account for liquidity premia and the deflation protection afforded by Japanese inflation-indexed bonds, known as JGBi’s. Adjusting for time-varying JGBi liquidity premia lowers the estimated value of JGBi deflation protection and raises inflation risk premium estimates, while long-term Japanese inflation expectations remain relatively stable at levels modestly exceeding one percent during the pandemic period. We then utilize our estimated liquidity measure to document statistically significant spillovers to JGBi market liquidity from global bond market illiquidity, as proxied by periods of low U.S. Treasury market depth.
Suggested citation:
Christensen, Jens H. E., and Mark M. Spiegel. 2024. “Inflation Expectations, Liquidity
Premia and Global Spillovers in Japanese Bond Markets.” Federal Reserve Bank of San
Francisco Working Paper 2024-12. https://doi.org/10.24148/wp2024-12