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Global correlation among government bond markets and Japanese banks' market risk

February 29, 2012
Yoshiyuki Fukuda, Kei Imakubo, Shinichi Nishioka
Financial System and Bank Examination Department

As international ties have been strengthened on the real economic front, global correlation has been higher in the government bond and other financial markets. Under the circumstances, Japanese banks' market risk associated with holdings of Japanese government bonds (JGBs) has been more susceptible to overseas shocks as well as domestic shocks. Once, for example, overseas government bond markets become volatile, JGB volatility is likely to rise through the market correlation and increase the amount of market risk for Japanese banks. In particular, the regional banks that have been increasing investment in medium- to long-term JGBs have been relatively susceptible to the increased volatility arising from overseas shocks. Banks and other market participants are required to assume various possible channels of shocks and to utilize multiple risk measurement methods including stress testing, thereby grasping market risk from various perspectives.

Notice

Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2012-E-1, is a translation of the original Japanese version, 2011-J-11, published in October 2011. The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan.

If you have comments or questions, please contact Kei Imakubo (E-mail: kei.imakubo@boj.or.jp).