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 JGBi liquidity premia lowers the estimated value of JGBi deflation protection and raises inflation risk premium estimates, while long-term inflation expectations remain relatively stable. Regression analysis using our estimated JGBi liquidity measure and bid-ask spreads of JGBs confirms the existence of significant spillovers to Japanese bond markets 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. 2026. “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