Despite holding the largest authorities debt stock as a portion of GDP in the universe and financial basicss expected to deteriorate in the extroverted period, Japan ‘s authorities bond outputs remain highly low. In this paper, we try to work out this mystifier by using inactive ARDL and dynamic Kalman Filter theoretical accounts. It is concluded that, high bond ownership ratio among families, corporate sector, pension-insurance financess and Bank of Japan plays a cardinal function in cut downing authorities bond outputs. Consequently, 1 per centum point addition in BOJ ‘s JGB stock relation to GDP will take to 3 footing points lessening in 10 twelvemonth JGB outputs. Similarly, 1 per centum point addition in families ‘ , corporate sector ‘s and pension-insurance financess ‘ JGB stock relation to GDP decreases 10 twelvemonth JGB outputs by 2 footing points. Government debt stock and abroad investors ‘ portion in entire JGB stock have a positive and important relationship with 10 twelvemonth JGB outputs. The Kalman Filter consequences support the ARDL theoretical account ‘s consequences. Sing the crisp decrease in salvaging rates due to quickly aging population and expected additions in societal security/pension expenditures a rush in adoption costs could convey along a possible default. To get the better of this hazard, primary balance of Japan must be improved.

Cardinal Wordss: Japan, Bond Yields, Debt Sustainability, Government Debt Stock, ARDL, Kalman Filter

JEL Classification Codes: E21, E43, E44, E52, E62.

## Introduction

As of 2011, Japan is the universe ‘s most indebted state with its authorities gross/GDP ratio of 230 per centum. Thankss to financial consolidation attempts, budget balance improved somewhat during 2003-2007 period. However, because of inauspicious effects of the planetary crisis in 2008, financial state of affairs worsened once more. In add-on to authorities debt stock/GDP ratio which was already high before the 2008 crisis, budget shortage surged further after the 2011 March temblor. Therefore, under a tense environment with Eurozone states confronting ague default hazard, many research workers started to oppugn Japan ‘s financial sustainability. As seen from Figure 1, Japan ‘s fiscal indexs are expected to deteriorate further in the extroverted period.

## [ Figure 1 About Here ]

On the other manus, despite turning concern on debt sustainability, Japan ‘s authorities bond ( JGB ) yields pull a assorted image. Since the 1990s, JGB outputs have systematically decreased while authorities gross debt stock was quickly increasing. Output of JGBs with 10 twelvemonth adulthood settled in the scope of 1-2 per centum at the terminal of 2003 and dropped below 1 per centum in the last months of 2011. Intensifying of the European Sovereign Debt Crisis and investors ‘ inclination of sing Japan as a “ safe oasis ” during crisis environment played a cardinal function in this decrease. As of 3rd one-fourth of 2012, Japan draws an interesting profile with holding highest authorities gross debt stock/GDP ratio and still borrowing at globally lowest rates.

In this paper, we examine the possible determiners behind Japan ‘s low authorities bond outputs. First, we examine the motivations behind the impairment of budget balance after 1965. Second, we explain the possible determiners of low Nipponese bond outputs. Third, we lay out the construction of our theoretical account and do both inactive and dynamic analyses utilizing ARDL and the Kalman Filter attacks. Finally, we discuss the consequences of two theoretical accounts and finish with reasoning comments.

## Fiscal Indexs of Japan After World War II

Japan pursued a balanced budget policy after World War II and did non execute a bond issue until 1965 ( Ihori et al, 2001 ) . However, budget shortage which gained impulse after 1973 oil crisis caused borrowing demand to increase further and authorities gross debt stock/GDP ratio peaked in 1987. During 1973-1987 period, budget shortage rose chiefly due to plummeted revenue enhancement aggregation and increased outgos in societal disbursement and public investing ( Asako et al. , 1991 ) . Even though budget shortage alleviated between 1987 and 1990, budget balance deteriorated once more during 1990-2000 period, which is frequently called as “ Japan ‘s lost decennary ” . During the lost decennary, revenue enhancement grosss decreased affectingly due to the lag in the economic system and public outgos were increased to extenuate the inauspicious effects of the crisis. Persistent deflation, increased societal disbursement due to aging population and rush in local authorities adoption has besides played a cardinal function in ballooned budget shortages ( Doi et al, 2011 ) .

Due to developments stated above, authorities gross debt stock/GDP ratio exceeded 100 per centum for the first clip in 1997. Although there were some consolidation enterprises in the undermentioned period, authorities gross debt stock/GDP ratio rose to 150 per centum in 2002 and exceeded 200 per centum in 2009 due to 2008 planetary crisis. With its authorities gross debt stock/GDP ratio of 230 per centum, Japan is clearly the most indebted state in the universe. Sing the authorities ‘s attempts to get the better of the inauspicious results of natural catastrophes occurred in 2011 and expected additions in societal security and pension outgos due to aging population, high degrees of budget shortage and debt stock to GDP ratios are expected to increase in the extroverted old ages. Indeed, harmonizing to IMF[ 3 ]‘s latest projections, Japan ‘s debt to GDP ratio is foreseen to lift to 250 per centum in 2017.

Concerns on debt sustainability and authorities solvency by and large associated with additions in authorities bond outputs and Credit Default Swap ( CDS ) degrees and decrease of authorities recognition evaluation. Latin American crises in 1990s and 2009 European autonomous debt crisis are important illustrations of this relationship. However, in Japan, despite multiple authorities recognition evaluation decreases and increased sustainability concerns since 1997, JGB outputs remained surprisingly stable. On the contrary, JGB outputs continued to diminish in the extroverted old ages and Japan enjoyed one of the universe ‘s lowest bond outputs as of 2012 October. As can be seen in Figure 2, 10 twelvemonth JGB outputs have remained below 2 per centum since 1998 and late reduced below 1 per centum.

## [ Figure 2 About Here ]

## Analysis of Japan ‘s Low Bond Outputs

## Strong Domestic Investor Base

High domestic ownership ratio of JGBs is a significant factor in finding low JGB outputs. As of 3rd one-fourth of 2012, around 92 per centum of the JGBs are being held by domestic investors. Investor profile besides has alone characteristics as around three-quarterss of outstanding authorities debt is being held by Bankss, pension and insurance houses runing in Japan. Therefore, the authorities is chiefly financing its shortages via domestic nest eggs and despite the unsafe upward tendency in authorities adoption, hazard premium and JGB outputs could be kept at low degrees.

In Japan, salvaging rates are really high among families and non-household private sector and the Nipponese pull a more conservative investor profile compared to other developed states. Since Nipponese investors seek stable outputs without exposing to currency hazard and output volatility, they by and large invest their nest eggs on sedimentations or hankering denominated stable output assets through insurance and pension financess[ 4 ]. Therefore, in contrast to holding a well-developed fiscal sector, traditional investor base keeps portion of derived functions and stock market investings low in entire fiscal investings. ( Ito and Parulian, 2010 ) . As for Bankss, insurance houses and pension houses, they prefer to put in JGBs with newly introduced sedimentations to the fiscal system.

Harmonizing to Basel regulations, JGBs have zero hazard weight in balance sheets and houses enjoy stable outputs under low hazard conditions. Therefore, families who finance merely 3 per centum of authorities debt stock at first manus, finance an extra 73 per centum with their sedimentations in an indirect manner. We can connote that, Nipponese private sector ‘s and families ‘ high nest eggs are able to finance most of the authorities ‘s negative nest eggs. This fact greatly reduces Japan ‘s exposure to abroad hazards and therefore authorities bond outputs remain unaffected by planetary fluctuations. In add-on, relentless deflation besides plays a large function in high demand for JGBs. After taking deflation into history, JGBs offered around 2 per centum stable return in existent footings, in the last 20 old ages. As a affair of fact, output volatility of JGBs remains unusually below the output volatility degree of other advanced states ‘ bonds, particularly during crisis periods.

## [ Figure 3 About Here ]

## Bank of Japan ‘s and State Owned Enterprises ‘ Role

Another of import facet of Japan ‘s authorities adoption is the high public ownership ratio of JGBs. Japan Post Bank, Japan Post Insurance and Japan Public Pension Fund which obtained private sector company position in 2007 are still province owned endeavors. These three companies hold JGBs worth up to tierce of authorities gross debt stock in their balance sheets. Even though these three companies are decided to be to the full privatized during 2011-2017 period, harmonizing to a edict enacted in 2011 at least one-third of the portions of these establishments will be continued to be owned by the authorities until 2017. Therefore, a important part of authorities debt is continued to be financed by public sector endeavors for a piece.

## [ Figure 4 About Here ]

Bank of Japan ( BOJ ) besides plays a important function in authorities debt funding and supports low adoption costs in an indirect manner. The Bank which holds a JGB stock of 92 trillion hankerings in its balance sheet as of 2011 easy decomposed from other cardinal Bankss of advanced states. BOJ ‘s JGB stock histories for about 19.2 per centum of GDP, while this ratio is 11 for Federal Reserve ( FED ) and around 6.7 for European Central Bank ( ECB ) . There are assorted plants in the literature look intoing the relationship between BOJ ‘s JGB retention policy and low Nipponese authorities bond outputs[ 5 ].

## [ Figure 5 About Here ]

BOJ ‘s and other public establishments ‘ high portion in authorities debt funding strengthens Japan ‘s plus construction and reduces the authorities net debt stock to about half of the gross debt stock. This development significantly alleviates the hazard premium of JGBs and lowers the adoption costs. Broda and Weinstein ( 2004 ) assert that if a public debt sustainability analysis is to be made for Japan, one should utilize authorities net debt stock alternatively of authorities gross debt stock. The writers imply that if net debt stock is taken as an explanatory variable, Japan ‘s liabilities do non menace financial sustainability.

## 2.3. Debt Sustainability

Public debt sustainability has ever been a popular subject in the literature. Domar ( 1944 ) indicates that public debt should non turn faster than GDP in order to be sustainable. Hamilton and Flavin ( 1986 ) assert that authoritiess need to equilibrate their current shortages with future excesss if they want to borrow swimmingly. Bohn ( 1995 ) points out the importance of primary balance and sets the debt sustainability status as primary balance/GDP ratio being a linearly increasing map of public debt stock/GDP ratio. Frisch ( 1995 ) argues that, if the existent involvement rate exceeds the existent rate of economic growing, the public debt becomes unsustainable. Blanchard ( 1990 ) defines financial sustainability as a status of continuance of the current policy under a stable public debt stock/GDP ratio. Baldacci and Kumar ( 2010 ) imply that addition in budget shortages and public debt stock lead to higher long-run involvement rates, while the magnitude depends on initial financial conditions[ 6 ].

There is besides a rich literature on debt sustainability chiefly focused on Nipponese economic system. Berkmen ( 2011b ) provinces that in order to stabilise the public net debt stock/GDP ratio by 2016 and so cut down to 135 per centum by 2020, primary shortage needs to be reduced by 10 per centum each twelvemonth, get downing from 2012. In the short term, this sort of contractionary financial policy is estimated to cut down the one-year growing rate between 0.3-0.5 per centum points. However, after 2020, growing rate gradually recovers and Japan will be on a sustainable growing way in the long tally. Ihori et Al. ( 2002 ) measures Japan ‘s financial sustainability status during 1957-1999 period utilizing Hamilton and Flavin ‘s ( 1986 ) method. They find that authorities solvency was non a job until 1996. Fukao ( 2012 ) implies that VAT rate should be raised to at least 25 per centum to stabilise the authorities gross debt stock/GDP ratio at its current degree. Cecchetti et Al. ( 2010 ) estimation that in order to turn back to 2007 ‘s authorities gross debt stock/GDP ratio Japan has to give primary excesss of 10.1 per centum for 5 old ages, 6.4 per centum for 10 old ages and 4.5 per centum for 20 old ages, comparative to GDP. Ito and Parulian ( 2010 ) step debt sustainability conditions for Japan during 1969-2009 period. The writers show that Japan has lost its financial sustainability get downing from 1998. Sakuragawa and Hosono ( 2010 ) uses dynamic stochastic general equilibrium theoretical account to prove financial sustainability conditions. They find that under current financial stance public debt is non on a sustainable way. To guarantee sustainability and stabilise gross public debt/GDP ratio at 230 per centum, primary shortage should turn into excess by 2022 and make to 2.2 per centum by 2032[ 7 ].

The literature shared above clearly ties a strong relationship between authorities financial stance and public debt sustainability. Since debt sustainability jobs are normally correlated positively with hazard premium and long term involvement rates[ 8 ], we expect a rush in JGB outputs in last decennary as Japan became the most indebted state in the universe[ 9 ]. However, JGB outputs draw a hard mystifier to work out. Despite recognition evaluation cuts, record high budget shortages and public debt stock, Nipponese bond outputs continued to worsen. Therefore, many surveies have tried to work out this mystifier. Cheng ( 1998 ) investigates the causal relationship between budget shortage involvement rates in Japan. Using Engle-Granger two measure process, the writer finds that budget shortages and involvement rates are non co-integrated neither in the short, nor in the long term. Nevertheless, the paper finds feedback causality between budget shortages and short term involvement rates. Tokuoka ( 2010 ) examines the determiners of the Nipponese bond output mystifier utilizing Ordinary Least Squares ( OLS ) on quarterly informations. He founds that an addition in net fiscal wealth of families and corporate sector significantly decreases 10 twelvemonth JGB outputs while authorities gross debt stock and portion of foreign retentions of JGBs have a positive correlativity with bond outputs. Hoshi and Ito ( 2012 ) analyses the possible grounds behind low JGB outputs despite the ample rush in authorities debt stock. They conclude that big sums of domestic nest eggs, lessenings in the rate of return due to dead economic system in all sectors and future financial consolidation outlooks are the chief drivers of low bond outputs. Chen ( 2011 ) finds out that higher authorities shortage as a per centum of GDP leads to a lower long-run involvement rate in Japan.

## Empirical Analysis

## Data and Methodology

The informations used for the analysis covers 1998Q1-2012Q3 period. We use 10 twelvemonth nominal JGB outputs as the dependant variable, which are taken from Bloomberg. Since we imply that high JGB retentions of Bank of Japan, pension-insurance financess, corporate sector, families and foreign investors play a important function in low JGB outputs, we use JGB stock/GDP ratios as explanatory variables. Households ‘ , corporate sector ‘s and pension-insurance financess ‘ JGB stock/GDP ratios are summed to organize a individual variable ( BONDSTOCK ) . The informations on Bank of Japan ‘s, pension and insurance financess ‘ , families ‘ and foreign investors ‘ JGB stock are obtained from BOJ ‘s Flow of Funds database. Households ‘ , corporate sector ‘s and pension-insurance financess ‘ JGB stock was summed up and divided to annualized GDP informations. BOJ ‘s and abroad investors ‘ JGB stock/GDP ratios were calculated in the same manner. GDP and authorities debt stock informations was acquired from Japan Cabinet Office.

Inactive analyses using an autoregressive distributed slowdown theoretical account ( ARDL ) theoretical account are normally used in empirical surveies in the literature. We distinguish our analysis from the bing literature by using a Kalman filter to picture the clip changing interaction between the variables.

We foremost examine the stationarity belongingss of the series by using Augmented Dickey Fuller ( ADF ) and Phillips-Perron ( PP ) and Ng-Perron trials. Then, in order to find the order of integrating for all series, we investigate the being of the long term co-integration relationship between variables by utilizing Bounds Test attack developed by Pesaran et Al. ( 2001 ) . Bounds trial attack has some advantages over the conventional co-integration theoretical accounts. First, this attack can be employed irrespective of whether the regressors are strictly I ( 0 ) or I ( 1 ) ( Pesaran et al, 2001 ) . Second, the Bounds Test co-integration attack has superior belongingss in little sample sizes than other co-integration attacks ( Narayan and Narayan, 2004 ) . After happening co-integration relationship between the variables, we examine the long and short term inactive relationship between the variables by using an ARDL theoretical account. Finally, we follow a dynamic attack by utilizing Kalman filter to picture the clip changing interaction between the variables. In clip changing parametric quantity ( TVP ) A theoretical accounts, the parametric quantities areA allowedA toA alteration with each new observation ( Koop and Potter, 2007 ) .

## Empirical Consequences

## Unit Root Trials

First, we investigate the stationarity features of the series. In this regard, we employ ADF ( Dickey and Fuller, 1979 ) , PP ( Phillips and Perron, 1988 ) and Ng-Perron ( Ng and Perron, 2001 ) trials and the consequences of conventional stationary trials are presented in Table 1.

## [ Table 1 About Here ]

For the ADF and PP trials, the void hypothesis suggests that the series include unit root. The deliberate T statistics for BOJ, GDS, BONDSTOCK and OVERSEAS are less than the critical values in their degree signifiers and greater than the critical values in their first differenced signifiers. This indicates that BOJ, GDS, BONDSTOCK and OVERSEAS variables are I ( 1 ) harmonizing to both the ADF and PP trials. For YIELD series, the deliberate T statistics is greater than the critical values in their degree signifier connoting that Output is I ( 0 ) .

As for Ng-Perron trial, harmonizing to, values the void hypothesis indicates that the series have unit root and harmonizing to MSB and MPT tests the void hypothesis shows that the series are stationary. For BOJ, GDS, BONDSTOCK and OVERSEAS series, the deliberate T statistics for, trials are less and for MSB and MPT trials are greater than critical values bespeaking that BOJ, GDS, BONDSTOCK and OVERSEAS are non-stationary in their degree signifiers. For the first differenced BOJ, GDS, BONDSTOCK and OVERSEAS series, the deliberate T statistics for, trials are greater and for MSB and MPT trials are less than critical values and BOJ, GDS, BONDSTOCK and OVERSEAS series are stationary after differencing. This suggests that BOJ, GDS, BONDSTOCK and OVERSEAS series are I ( 1 ) harmonizing to the Ng-Perron trial. For YIELD series, harmonizing to, trials, the deliberate T statistics is greater and for MSB and MPT tests the deliberate T statistics is less than the critical values proposing Output is stationary in its degree signifiers.

In amount, all unit root trials consequences imply that BOJ, GDS, BONDSTOCK and OVERSEAS series are stationary after differencing and YIELD is stationary in its degree signifier.

## Boundaries Test Co-integration Approach

After look intoing stationarity of series, we investigate the co-integration relationship between 10 twelvemonth JGB outputs, JGB stock of BOJ, families, corporate sector and pension-insurance financess, and abroad investors by using Bounds Test attack developed by Pesaran et Al. ( 2001 ) . For the Bounds trial analysis, we foremost organize the Unrestricted Error Correction theoretical account ( UECM ) . UECM specification for our survey is shown in equation 1.

( 1 )

Where, YIELD is 10 twelvemonth JGB outputs, BOJ is Bank of Japan ‘s outstanding JGB stock relation to GDP, GDS is authorities gross debt stock relation to GDP, BONDSTOCK is JGB stock of families, corporate sector and pension-insurance financess comparative to GDP and OVERSEAS is the portion of abroad investors entire JGB stock. In equation 1, “ m ” represents figure of slowdowns and “ T ” represents tendency variables.

Null hypothesis for the F trial is formed as for our instance and calculated F statistics is compared with table underside and upper critical degrees in Pesaran et Al. ( 2001 ) . If the computed F-statistic falls outside the critical bounds, a conclusive deAcision can be made sing co-integration without cognizing the order of inteAgration of the regressors. For case, if the estimated F statistics is higher than the upper edge of the critical values, so the void hypothesis of no co-integration is rejected. If the estimated F statistics is lower than the bottom edge of critical values, there is no co-integration relationship between the series ( Narayan and Narayan, 2004 ) . If the deliberate F statistics is between the underside and upper critical values, no exact sentiment can be made ( Karagol, Erbaykal and ErtuAYrul, 2007 ) .

After finding lag figure of UECM theoretical account as[ 10 ], co-integration relationship is analyzed. Table 2 shows the Bounds trial consequences.

## [ Table 2 About Here ]

Table 2 indicates that F statistics exceed the upper edge of the critical values, therefore the void hypothesis of no co-integration is rejected. In amount, a important long run co-integration relationship between the variables is found by using the Bounds trial analysis.

## The ARDL Model

After the co-integration analysis, we investigate the long and short tally inactive relationship between the variables by using the ARDL theoretical account. The ARDL theoretical account specification for our survey is presented in equation 2.

( 2 )

In order to find the optimum slowdown length, maximal lag figure chosen as 8 and by using the Schwarz information standards ARDL ( 1,0,0,0,0 ) theoretical account[ 11 ]is selected. The estimated long and short term coefficients utilizing ARDL ( 1,0,0,0,0 ) theoretical account are shown in Table 3.

## [ Table 3 About Here ]

Harmonizing to long term coefficients of the ARDL theoretical account, all dependent variables are statistically important. In analogue with our given, long term coefficient of BOJ ‘s JGB stock is estimated as -0.033. The long-term coefficient suggests that 1 per centum point addition in BOJ ‘s JGB stock relation to GDP will take to 3 footing points lessening in 10 twelvemonth JGB outputs. As expected, the BONDSTOCK coefficient besides found negative connoting an inauspicious relationship with 10 twelvemonth JGB outputs. Consequently, 1 per centum point addition in BONDSTOCK reduces 10 twelvemonth JGB outputs by 2 footing points. As expected GDS and OVERSEAS both have a positive and important relationship with JGB outputs. Short term coefficients besides point out to similar consequences with long term coefficients and all variables are statistically important.

The mistake rectification term, ECT ( -1 ) , is the one period lagged value of mistake footings obtained from the equilibrium relationship. The coefficient of ECT ( -1 ) shows eliminated rate of the short tally disequilibrium in the long tally ( MangA±r and ErtuAYrul, 2012 ) . The ECT coefficient is estimated as -0.94 saying that about 94 % of disequilibrium from the old one-fourth daze eliminated in the current term. In other words, if a divergence from the long term equilibrium occurs, the system will set about in 1 one-fourth.

## Dynamic Approach

We form our dynamic attack by using the Kalman Filter based Harvey ( 1989 ) . A additive province infinite of the kineticss of an equation can be represented as

( 3 )

( 4 )

where in our instance is a vector of unseen province variables, where, and are adaptable vectors and matrices, and whereandare vectors of mean nothing, Gaussian perturbations. As stated in equation ( 4 ) , unseen province vector is assumed to alter over clip as a first-order vector auto-regression ( MangA±r and ErtuAYrul, 2012 ) . The Kalman filter recursively estimates the parametric quantities by updating the appraisal with every extra observation ( Koop and Potter, 2007 ) .

The Kalman filter specification used in our survey is presented in equations 5 and 6 below.

( 5 )

( 6 )

The clip changing parametric quantity estimations by using Kalman Filter attack for the 2005Q1-2012Q3 period are shown in Figure 6.

## [ Figure 6 About Here ]

The Kalman Filter consequences show that BOJ ‘s JGB stock relation to GDP has a negative and authorities debt stock relation to GDP has a positive and incrementally diminishing consequence on 10 twelvemonth JGB Yields, severally. After quantitative moderation policy was abandoned get downing from 2006Q1, the coefficient of BOJ begins to diminish until 2008 planetary fiscal crisis. Get downing from 2009Q3, the coefficient of BOJ stabilizes once more. Households ‘ , corporate sector ‘s and pension-insurance financess ‘ JGB stock relation to GDP has a negative and incrementally increasing consequence on 10 twelvemonth JGB Yields, while abroad investors ‘ portion in entire JGB stock ‘s consequence is positive and incrementally increasing. BONDSTOCK and OVERSEAS series both follow a positive and incrementally increasing tendency over the 2005Q1-2012Q3 period.

## Decision

Rapid impairment in family nest eggs ratio and an expected rush in societal security/pension outgos due to its ageing population indicate a glooming mentality for Japan ‘s financial indexs. As being the most indebted state in the universe, Japan ‘s financial sustainability is called into inquiry.

Despite holding the largest authorities debt stock as a portion of GDP in the universe and its financial basicss are expected to deteriorate in the extroverted period, Japan ‘s authorities bond outputs remain highly low. In this paper, we try to work out this mystifier by using inactive ARDL and dynamic Kalman Filter theoretical accounts. In the empirical analysis, we foremost analyze the stationarity features of the series by using ADF, PP and Ng-Perron trials. All unit root trials point out that the all the variables except Output are I ( 1 ) , while Output is I ( 0 ) . Then, we investigate the being of the long term co-integration relationship by using Bounds Test developed by Pesaran et Al. ( 2001 ) . Harmonizing to the Bounds Test consequences, we find a important long run co-integration relationship between our variables. Then, we examine the long and short tally inactive relationship between the variables by utilizing ARDL theoretical account. Finally, we analyze the dynamic relationship between the variables by using Kalman filter attack.

Both ARDL and Kalman Filter consequences are statistically important and their coefficients have expected marks. ARDL theoretical account ‘s long term coefficients exhibit that BOJ and BONDSTOCK have a negative relationship with JGB outputs and play a cardinal function in cut downing JGB outputs. Consequently, 1 per centum point addition in BOJ ‘s JGB stock relation to GDP will take to 3 footing points lessening in 10 twelvemonth JGB outputs. Similarly, BONDSTOCK besides has an negative relationship with 10 twelvemonth JGB outputs. Consequently, 1 per centum point addition in BONDSTOCK reduces 10 twelvemonth JGB outputs by 2 footing points. As expected, GDS and OVERSEAS series have a positive and important relationship with 10 twelvemonth JGB outputs. In amount, sing the coefficients as a whole, we can asseverate that BOJ ‘s, families ‘ , corporate sector ‘s and pension-insurance financess ‘ high JGB ownership is countervailing the public debt stock ‘s and abroad investors ‘ JGB portfolio ‘s effects on JGB outputs. Furthermore, the ECT coefficient is estimated as -0.94 connoting if a divergence from the long term equilibrium occurs, the system will set about in 1 one-fourth.

The Kalman Filter consequences show that BOJ ‘s JGB stock relation to GDP has a negative and authorities debt stock relation to GDP has a positive and incrementally diminishing consequence on 10 twelvemonth JGB Yields, severally. After quantitative moderation policy was abandoned get downing from 2006Q1, the coefficient of BOJ begins to diminish until 2008 planetary fiscal crisis. Get downing from 2009Q3, the coefficient of BOJ stabilizes once more. Households ‘ , corporate sector ‘s and pension-insurance financess ‘ JGB stock relation to GDP has a negative and incrementally increasing consequence on 10 twelvemonth JGB Yields, while abroad investors ‘ portion in entire JGB stock ‘s consequence is positive and incrementally increasing. BONDSTOCK and OVERSEAS series both follow a positive and incrementally increasing tendency over the 2005Q1-2012Q3 period.

It can be inferred that JGB outputs may cut down farther as families, corporate sector and pension-insurance financess increase their JGB stock. However, there are restrictions in balance sheet enlargement of BOJ, families, corporate sector and pension-insurance financess. At this phase, in instance of a rush in authorities debt stock/GDP ratio, JGB outputs may increase significantly. In add-on, sing the impairment in family nest eggs, a possible addition in foreign ownership ratio of JGBs may besides excite JGB outputs. A possible decrease in bond monetary values may increase authorities ‘s adoption costs and aggravate balance sheet of corporations. Sing this spillover consequence, this quandary has a possible to do a new fiscal crisis.

To get the better of this hazard, primary balance of Japan must be improved. Recent blessing of gradual addition in VAT rate has a positive measure towards financial sustainability, but Japan ‘s VAT rate is still one of the lowest in the universe. Therefore, the authorities may see increasing VAT rate further in the extroverted old ages in order to beef up its financial sustainability. Another important measure to better the primary balance is to acquire the ripening related outgos under control. To make this, a comprehensive pension reform is needed.