




































Economy 
ISSN: 2313-8181 
Vol. 3, No. 1, 19-23, 2016 
www.asianonlinejournals.com/index.php/Economy 
 

  

 

 

 

 

19 

 

Term Structure of Interest Rates under Zero or Low 

Bound: The Recent Japanese Case 

 
Yutaka Kurihara1 
 

1
Aichi University, Department of Economics, Hirakie 

Nakamura Nagoya, Japan 

 
Abstract 

This article examines the recent term structure of interest rates in Japan. No consensus has been reached 

on whether or not the yield curve can be asymmetric and can be an economic predictor, although much 

discussion has occurred. In Japan, the zero or low-bound interest rate policy and, after that, the 

quantitative easing policy was conducted to boost the economy since the end of 1990s. Recession and 

deflation have been ongoing for more than 20 years. The term structure of interest rates uses an unusual 

style compared to the normal structure, especially during zero or low-bound period, as interest rates in 

general tend not to be negative. Using empirical methods, this article shows that the term structure is a 

nonlinear relationship between short- and long-term rates during the zero or low-bound policy period in 

Japan. For the sensitivity of short-term yields to long-term interests, there is no evidence for symmetric 

response to positive and negative short-term rate change; however, and only during the zero or low-

bound interest rate policy era, there is a symmetric response on longer-term interest rate. Moreover, the 

long-term yield spread is not a good predictor of recessions.   
 

Keywords: Monetary policy, Quantitative easing, yield curve, Zero or low interest rate. 
 
Contents 

1. Introduction ......................................................................................................................................................................... 20 

2. Theoretical Backgrounds ..................................................................................................................................................... 21 

3. Empirical Methods .............................................................................................................................................................. 21 

4. Empirical Results ................................................................................................................................................................. 22 

5. Conclusions .......................................................................................................................................................................... 22 

References ................................................................................................................................................................................ 23 

 
 

Citation | Yutaka Kurihara (2016). Term Structure of Interest Rates under Zero or Low Bound: The Recent Japanese Case. Economy, 3(1): 19-23. 

DOI: 10.20448/journal.502/2016.3.1/502.1.19.23       

ISSN(E) : 2313-8181   

ISSN(P) : 2518-0118 

Licensed:  This work is licensed under a Creative Commons Attribution 3.0 License  

Funding: This study received no specific financial support. 

Competing Interests: The author declares that there are no conflicts of interests regarding the publication of this paper. 

Transparency: The author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no 

vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. 

Ethical: 

History: 

This study follows all ethical practices during writing.   

Received: 1 September 2015/ Revised: 12 December 2016/ Accepted: 25 January 2016/ Published: 4 February 2016 

Publisher: Asian Online Journal Publishing Group 

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Economy, 2016, 3(1): 19-23 

 

 

 

 

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1. Introduction 
This paper examines the recent term structure of interest rates in Japan and assesses whether or not the slope of 

the yield curve can be a good predictor of recession. In Japan, the zero or low-bound interest rate policy and later, the 

quantitative easing policy, have been implemented to boost the economy. Recession and deflation have been ongoing 

for more than 20 years. The term structure of interest rates during these times use a style that differs from the normal 

situation as interest rates in general tend not to be negative. It should be noted that these analyses were conducted 

during recession. Although there has been much discussion about yield curves, no consensus has been reached.  

Japan enjoyed high economic growth during the 1980s. Stock and land prices increased enormously starting in 

the middle of the 1980s. After the signing of the Plaza Accord with the G5 countries, including Japan, in 1985, the 

Japanese yen appreciated sharply. Usually appreciation of the yen (i.e., the domestic currency) causes a loss in 

international competitiveness with foreign countries, decreased exports, and recession in Japan; however, exports did 

not decline and the economy did not shrink. Consumer prices did not rise greatly. It was lucky for the Japanese 

economy that oil prices did not increase sharply. However, the bubble economy burst at the end of the 1980s, and the 

Japanese economy experienced recession. In the 1990s, however, the country suffered a recession with very low and 

sometimes negative growth rates late in the decade and in the beginning of the 2000s. The largest reason for the 

recession was said to be the country’s weak and fragile financial system and structural problems such as delays in 

political and economic systems. Barriers of deregulation in many areas are typical examples.  

The Bank of Japan (BOJ) introduced a new and unprecedented monetary policy, the zero interest rate policy, in 

February 1999. The BOJ judged that Japan’s economic indicators had come to a pause, so it adopted a policy of 

maintaining interest rates at an unprecedented low level. Japan’s experience with this quantitative easing policy, 

more aggressive policy, by the BOJ dates back to March 2001. Following a period of zero interest rate policy 

(February 1999–August 2000), the BOJ introduced this quantitative easing policy in March 2001. The main 

operating target for many market operations changed from the uncollateralized overnight call rate to be the 

outstanding balance of the current account at the BOJ. At the end of 2001, the BOJ raised the outstanding balance of 

the current account at the BOJ from around 10 to 15 trillion yen. Under this quantitative easing policy, the BOJ 

employed purchases of Japanese government bonds as the main instrument to reach its target. The BOJ, with interest 

rates at their zero or low bound, conceived a goal of purchasing government securities from the banking sector. This 

aim can be understood as sending money to the economy, promoting increases in asset prices, and removing 

deflationary pressures. In March 2006, the BOJ exited quantitative easing amid signs that deflation was ending and 

the recession had disappeared. On July 14, 2006, the zero interest rate policy ended. 

After the occurrence of the subprime problems in 2007 and the Lehman shock in 2008, a huge amount of capital 

flowed into the Japanese financial markets in spite of the fact that the Japanese economy still was not in good 

condition. The Japanese yen appreciated against other currencies, which hit the Japanese economy. In October 2010, 

the BOJ introduced its comprehensive monetary easing policy to respond to the re-emergence of deflation and a 

slowing recovery. One key measure was an asset purchase program that involved government bonds as well as 

private assets. After that, the Japanese government changed and more aggressive fiscal policy was strongly 

demanded. The zero interest rate policy was in effect beginning in October 2010 and continues in force now.  

 In Japan, a drastic new policy, called Abenomics (for Abe, the prime minister), was adopted in 2013. 

The Japanese government not only implemented drastic fiscal policy but also took measures to 

strengthen competitiveness and economic growth. Japan has been under severe economic conditions, 

namely, deflation. These measures included possible policy actions to reform the economic structure, 

such as concentrating resources on innovative research and development, strengthening the foundation 

for innovation, performing regulatory and institutional reforms, and changing the tax system (increasing 

the consumption tax and reducing the corporate tax). Moreover, by strengthening coordination between 

the BOJ and the government, since 2013, the Japanese government has implemented measures to 

achieve a new fiscal structure to ensure the credibility of the fiscal condition. BOJ introduced 

Abenomics, an unprecedented aggressive monetary policy, in April 2013. Kurihara and Fukushima 

(2013)  showed that Abenomics seems to be effective at present; however, the effects have been limited. 

Most people consider that the recent good performance of the economy actually is mainly a result of 

Abenomics rather than the zero interest rate policy. However, this study shows that the zero interest rate 

policy has influenced activity for the long-term. Thus there is some possibility that the zero interest rate 

policy has caused the present good situation. It seems necessary to distinguish between the effect of the 

zero interest rate policy and those of quantitative easing policy or Abenomics. 

Much discussion has taken place about the yield spread of interest rates. From the view of monetary policy, 

Bernanke and Blinder (1992) showed that monetary tightening results in short-term interest rates that are high 

relative to long-term interest rates. In turn, high short-term interest rates cause slowing of the economy. Kim and 

Singleton (2012) and Krippner (2013) noted that the extent to which the shadow rate is below the short-term interest 

rate is a measure of the degree to which the zero or low bound interest rates are binding. Swanson and Williams 

(2014) showed that long-term yields tend to be responsive to economic news for much of the zero or low-bound 

interest rates period, which implies that monetary policy remains effective by influencing long-term yields using 

forward guidance and asset purchases. One can safely say that under the zero or low-bound interest rates, some 

consideration would be necessary. 

Ruge-Murcia (2006) showed that when zero low bound is taken into account, the hypothesis of expectations for 

the yield spread means a nonlinear relationship between changes in short-term interest rates and long-term ones. As 

the short interest rate becomes zero, the sensitivity of long-term interest rates with respect to short-term interest rates 

declines. This response becomes asymmetric with short-term rate increases associated with larger absolute long-term 

interest rate movement rather than decreases in the short-term. The extent to which these nonlinearities exist is 

informative about the transmission of short-term rates changes to long-term ones (Grisse, 2015). Ruge-Murcia (2006) 

estimated whether or not the nonlinearities of yield spread exist in Japan and found that the sensitivity of yields to 



Economy, 2016, 3(1): 19-23 

 

 

 

 

21 

 

short-term rate movement decreased before the zero or low bound was reached but expanded with the BOJ’s asset 

purchases. Gürkaynak et al. (2005) and Swanson and Williams (2014) showed that 1-year and 2-year treasury bond 

yields were unconstrained, which indicates that monetary and fiscal policy were as effective as usual. Grisse (2015) 

examined whether these effects exist in the US term structure and found no evidence for the expected asymmetric 

effects of short-term rate increases versus declines.  

Also, whether or not the yield curve can be a predictor for the economy has been examined but no consensus has 

been reached. Mehl (2009) showed that yield curves for the United States and the Euro area for emerging economies 

produces information that may predict future economic growth. This means that monetary policy changes in the 

United States make international financial linkages strong as a result of interest rate pass-through.  

This article focuses on the period of recession in Japan. Mishkin (1990a;1990b) and Estrella and Hardouvelis 

(1991) showed that an inversion of the slope of the yield curve indicates a recession back to the 1990s in the United 

States. Ahrens (2002) noted that the term structure is a predictor of recessions in eight OECD countries. Karunaratne 

(2002) showed that stationary variables revealed that the yield curve produces a good forecast of economic activity. 

On the other hand, Plosser and Rouwenhorst (1994); Bonser-Neal and Morley (1997); Kozicki (1997); Estrella 

and Mishkin (1997) and Estrella et al. (2003) showed that evidence on the ability of the yield curve to help predict 

future growth for other countries has so far been difficult and is limited to a few industrialized countries. Estrella and 

Mishkin (1996) and Estrella and Trubin (2006) showed that empirical results depend on macroeconomic variables. 

Also, a variety of non-negative symmetric term structure models lead to various predictions regarding the behavior 

of longer-term yields around the zero or low bound (Kim and Singleton, 2012). De (2013) showed that the term 

structure is not a reliable predictor of economic growth. 

Moreover, Mishkin (1990a;1990b;1991) indicated that the slope of the yield curve causes expected inflation 

changes. Greenspan (2005) showed that many factors can influence the yield curve, including the gap between long-

term and short-term inflation expectations or the risk premium. Vayanos and Vila (2009) showed that each maturity 

of interest rates has its own clientele and substitution across financial instruments maturities is performed by risk-

averse arbitrageurs. Guibaud et al. (2013) showed that if agents are more risk-averse, an increase in the long-term 

clientele increases the price and optimal supply of long-term bonds. 

 

2. Theoretical Backgrounds 
This article examines the recent term structure of interest rates in Japan and whether or not the term structure can 

be a good predictor for the economy. For the first objective, the following term-structure model is considered (Ruge-

Murcia, 2006; Grisse, 2015). 

rt = a +∑  
 
   jrt-j +cxt +εt (1) 

r*t = max (rt, 0) (2) 

Rt = 
 

 
(rt + E(rt+1 | It) +・・・+ E(rt+n-1 | It)) +θt (3) 

Equation (1) means that rt depends on past short-term interest rates and on the m×1 vector of exogenous 

variables xt; and bt the m×1 vector c are parameters; and εt is a shock. Equation (1) imposes the constraint that the 

short-term interest rate, r*t, is non-negative where rt denotes the shadow rate. Equation (3) says that the yield of an n-

period bond Rt is determined by this expectation hypothesis, plus a liquidity and term premium θt, which is not 

correlated with εt. When r*t = 0, the shadow rate is unobserved and expectations of rt can be calculated conditional on 

the information set, It, which includes variables observed at each period t. Ruge-Murcia (2006) and Grisse (2015) 

showed that the solution implies a nonlinear relationship between short-term interest rate changes and associated 

changes in long-term interest rates. 

This article also examines whether or not the slope of the yield curve is a good predictor of the economy. The 

period of recession in Japan is focused. If empirical results support the relationship between the slope of the yield 

curve and economic activity, the relationship is positive and reflects the expectations of markets regarding future 

economic growth. A positive spread between long-term and short-term interest rates, that is, a steep yield curve, is 

linked to an expectation of an increase in economic activity. On the other hand, negative spread, that is, a flattening 

or inverted yield curve, is associated with an expectation of a decline in economic growth. 

 

3. Empirical Methods 
Daily and quarterly data on Japanese bond yields of constant maturity were obtained from International Financial 

Statistics (IMF). Daily figures are from January 1999 to July 2015.The total data are divided into two parts. One is to 

July 13, 2006, and the other is from July 14, 2006. On July 14, 2006, the zero interest rate policy ended. Quarterly 

data are from 1999Q1 to 2015Q1 and also are divided at 2006Q3. The zero interest rate policy was first introduced in 

Japan in 1999. 

The following regression calculates the effect of changes in short yields ∆yt: 

∆yt = a + bplus(∆xt>0) ∆xt + bminus(∆xt<0) ∆xt +εt (4) 

Where plus and minus are the indicator function. This specification is estimated in Ruge-Murcia (2006) and Grisse 

(2015). The coefficients change using rolling regressions over 2-year periods are estimated as follows: 

bsize,t = (bplus + bminus)/2 

bsign,t = (bnegative - bpositive) 

If the zero low bound is binding, bsize is less than its average value. Also, if bsign is less than the average value 

of that one, the zero bound is binding. 

Also, the recession is regressed by a measure of steepness. The steepness of the yield curve is defined as the 

difference between long-term and short-term interest rate (Estrella and Mishkin, 1996; Estrella and Trubin, 2006; 

Ozturk and Felipe, 2013).  

A measure of the forecast for the economy is calculated as shown in Equation (5).The probit model is used for 

estimation. This model is used to model binary outcome variables. In this model, the standard normal distribution of 



Economy, 2016, 3(1): 19-23 

 

 

 

 

22 

 

the probability is modeled as a linear combination of the predictors. It is a popular specification for a binary response 

model. Recession is defined as occurring if a country reports negative GDP growth. To explain the variable, 1 means 

recession and 0 means otherwise. 

recessiont = a + bslope(-1) +εt 

 (5) 

4. Empirical Results 
The results are shown in Tables 1–Table 3.Tables 1 and 2 show the results of Equation (1). The sample period of 

Table 1 is from the beginning of 1999 to July 13, 2006.As explained above, it is mainly during zero or low-bound 

interest rate policy era. The period of Table 2 is from July 14, 2006, to the end of July 2015. This period is also 

mainly during the quantitative easing era. In both Tables 1 and 2 nY means the maturity of bonds. n denotes year and 

Y denotes year. Also, nMP and nMM mean maturities of bonds. n means month, P means plus, and M means minus. 

The results shown Tables 1 and 2 are interesting. Only the case of zero or the low-bound interest rate policy era and 

10-year bond (the longest one) is significant. During that era, the interest rates moved symmetrically. However, 

except for the case of 1- year, the results are not significant. In Table 2 all of the coefficients show that interest rates 

moved asymmetrically. However, none of the coefficients are significant. Thus, during zero or the low-bound 

interest rate policy era, interest rates moved according to the theory for the case of long-term interest rate. 

For size and sign, high volatility is found during the period of quantitative easing era. It may reflect the BOJ’s 

large scale purchases of financial assets. 

 
Table-1. Zero or low-bound interest rate policy era 

 2Y 3Y 5Y 10Y 

C 2.17E-05 

(0.132) 

2.38E-05 

(0.120) 

3.83E-05 

(0.150) 

0.0005 

(0.262) 

3MP 6.21E-05 

(0.012) 

2.96E-05 

(0.005) 

6.51E-05 

(0.008) 

0.140** 

(2.332) 

3MM 0.0002 

(0.033) 

0.0006 

(0.074) 

0.001 

(0.092) 

0.225** 

(2.254) 

Adj.R2 -0.0003 -0.0003 -0.0003 0.0006 

F-Statistic 0.001 0.005 0.008 3.204 

Prob (F-Statistic) 0.998 0.994 0.991 0.040 

Durbin-Watson 1.844 1.877 1.928 2.929 
 Note: Figures in parentheses are t-values. ***, **, and * denote significanceat 1, 5, and 10% respectively. 

 

Table-2. Quantitative easing era 

 2Y 3Y 5Y 10Y 

C 6.64E-05 

(0.135) 

7.57E-05 

(0.128) 

0.0001 

(0.160) 

-0.0005 

(-0.889) 

3MP -0.002 

(-0.043) 

-0.004 

(-0.069) 

-0.0006 

(-0.078) 

-0.026 

(-0.355) 

3MM 0.029 

(0.313) 

0.056 

(0.490) 

0.089 

(0.612) 

0.095 

(0.744) 

Adj.R2 -0.0008 -0.0008 -0.0007 -0.0006 

F-Statistic 0.062 1.152 0.240 0.280 

Prob (F-Statistic) 0.939 0.858 0.786 0.755 

Durbin-Watson 1.158 1.208 1.264 2.446 
Note: Figures in parentheses are t-values. ***, **, and * denote significance at 1, 5, and 10% respectively. 

 

Equation (5) was estimated to evaluate whether or not the long-term yield spread is a good predictor of 

recessions. The explained variable was the binary variable, recession. The results are shown in Table 3.  

 
Table-3. Long-term yield spread and recession 

C 0.540*** 

(2.747) 

0.549*** 

(8.261) 

0.558*** 

(2.852) 

0.529*** 

(8.201) 

10Y(-1)-3m(-1) 0.019 

(0.116) 

 -0.012 

(-0.078) 

 

2Y(-1)-3m(-1)  0.462 

(0.797) 

 0.407 

(0.704) 

GDP(-1) -0.027 

(-1.057) 

-0.028 

(-1.121) 

  

Adj.R2 -0.013 -0.003 -0.015 -0.007 

F-Statistic 0.561 0.877 0.006 0.495 

Prob (F-Statistic) 0.573 0.420 0.938 0.483 

Durbin-Watson 1.558 1.588 1.598 1.630 
Note: Figures in parentheses are t-values. ***, **, and * denote significance at 1, 5, and 10% respectively. 

 

In most cases, the coefficients are positive as expected; however, they are not significant. Therefore, the long-

term yield spread is not a good predictor of recessions. 

 

5. Conclusions 
This study examined the term structure of interest rates in Japan during the era of zero or low interest rate policy 

and the era of quantitative easing policy. Using empirical methods, this article showed that the term structure has a 



Economy, 2016, 3(1): 19-23 

 

 

 

 

23 

 

nonlinear relationship between short- and long-term rates under zero or the low bound in Japan. For the sensitivity of 

short-term yields to long-term interests, there was no evidence of a symmetrical response to positive and negative 

short-term rate changes in most cases; however, only in the case of zero or low-bound interest rate policy era is there 

a symmetrical response with longer-term interest rates. Moreover, the long-term yield spread is not a good predictor 

of recessions. 

The results are not surprising. Zero or very low interest rates are a specific case and usually interest rates do not 

move into the negative. However, it is difficult to judge the case of quantitative easing policy era as it was largely 

related to the zero interest rate policy. The distinction is quite difficult. Also, yield spread is not a good predictor of 

recessions: however, there is some room for the empirical results as in reality interest rates are strongly related to 

future economic expectations. Further study is needed. It would be meaningful to consider economic or monetary 

policy. 

 

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