1995 Reports

Japanese government bond auctions: The U.S. experience

Hamao, Yasushi

There has been constant friction between the U.S. and Japan on economic issues. After lengthy negotiations and threats of reprisal, Japan agreed to sell its Government Bonds through auctions that were open to foreign competition. This paper examines the U.S. experience in the Japanese Government Bond (JGB) auctions. It also empirically tests the predictions of auction theory with JGB auction data. While the winning share of U.S. firms in 10-year JGB auction market went through ups and downs, their share in the 20-year market has increased steadily. We find that the winning shares by the U.S. firms are positively related to auction profits, whereas the Japanese "Big Four" winning shares show negative association. We offer some possible explanations for this phenomenon. Furthermore, the average profits to winning bids in JGB auctions is not reliably different from zero, and the degree of competition and the level of uncertainty are found to be insignificant in determining auction profits.