1991 Reports

Monetary policy and the term structure of interest rates in Japan

Hamao, Yasushi; Campbell, John Y.

This paper studies the relation between short-term and long-term interest rates in Japan. The paper finds that there was a change in the behavior of the Japanese term structure in the mid-1980's. Short-term rates became less forecastable from their own past history; at the same time, the ability of the Japanese yield curve to forecast short-term rates increased. In this sense the expectations theory has become a more appropriate description of the Japanese term structure, even though the theory is rejected at conventional levels of statistical significance.