The Puzzle of Low Government Bond Yields in Japan

Despite having the largest government debt stock as a share of GDP in the world and a gloomy fiscal outlook, Japan's government bond yields remain extremely low. This paper empirically examines the domestic fiscal factors behind the puzzle of low government bond yields in Japan by employing a static ARDL model and a dynamic Kalman-filtering approach. The empirical results show that high bond ownership of households, corporations, pension-insurance funds, and the Bank of Japan (BOJ) itself play a key role in reducing government bond yields. The Kalman filter results support the ARDL model's findings.