Skip to main content

A Macro-Finance Analysis of the Term Structure and Monetary Policy in Japan:

Using a Model with Time-Variant Equilibrium Rates of Real Interest and Inflation and with the Zero Lower Bound of Nominal Interest Rates

August 2007
Nobuyuki Oda*1
Takashi Suzuki*2

Click on wp07e17.pdf to download the full text.


We study the term structure of interest rates and monetary policy in Japan empirically, using a macro-finance model. In particular, we investigate whether or not Japan's low long-term interest rates can be explained with economic rationality by taking into account some key features of the economy: possible time-variability of perceived equilibrium rates of real interest and inflation, the effect of the zero lower bound of nominal interest rates, and the effect of the zero interest rate commitment by the Bank of Japan. We are also interested in the estimation of the macroeconomic structure based not only on macroeconomic data but also on market interest rate information.

Specifically, we use a New Keynesian-type macro structural model and an affine diffusion model of the term structure, taking into account the non-linearity related to the zero interest rate constraint. We estimate the models simultaneously using monthly time-series data including the estimated monthly series of GDP. We find that both the perceived equilibrium rates have been time-variant since the end of 1980s, and that the macro-finance model gives us a rational explanation of low interest rates although there are some caveats in interpreting the results. We also carry out a decomposition of the interest rates into various components, and analyze the causes of model errors.

Key words:
Macro-finance model; Monetary policy; Term structure of interest rates; Risk premium; Equilibrium real interest rate; Zero interest rate

JEL classification:
E43, E52, G12

The authors are grateful to Yosuke Takeda (Sophia University), the participants at the Japanese Economic Association 2006 Fall Conference, the participants at a seminar in Monetary Affairs Department of the Bank of Japan (BOJ), and other colleagues at the BOJ including Hiroshi Fujiki, Takeshi Kimura, Naruki Mori, Shigenori Shiratsuka, and the members of the financial study team at the Institute for Monetary and Economic Studies of the BOJ, for their helpful comments and discussions. The opinions expressed here, as well as any remaining errors, belong to the authors and should not be ascribed to the BOJ.

  • *1 Monetary Affairs Department, (currently, International Department), Bank of Japan.
  • *2 Monetary Affairs Department, Bank of Japan.


Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank.

If you have any comment or question on the working paper series, please contact each author.

When making a copy or reproduction of the content for commercial purposes, please contact the Public Relations Department ( at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited.