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Liquidity in JGB Markets

: An Evaluation from Transaction Data

May 8, 2015
Tetsuo Kurosaki*1
Yusuke Kumano*2
Kota Okabe*3
Teppei Nagano*4

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There is no single, widely-accepted definition of "market liquidity" even though the expression "market liquidity is high/low" is frequently used, and measuring market liquidity is not easy. Recognizing these challenges, this paper formulates a set of new liquidity indicators using transaction data of the markets related to Japanese government bonds (JGBs), including futures, cash, and special collateral (SC) repo, thereby examining market liquidity from various angles. Traditional liquidity indicators of the JGB futures market such as the bid-ask spread and the daily price range to transaction volume ratio suggest that liquidity in the JGB market has not declined significantly, even after the expansion of quantitative and qualitative monetary easing (QQE) in October 2014. However, the indicators newly formulated in this paper -- the volume of limit orders at the best-ask price, the impact of a unit volume of transactions on the market price in the JGB futures market, the divergence in quotes offered by dealers in the JGB cash market, and the lending fee of JGBs in the SC repo market -- all suggest that liquidity in the JGB market has been declining since fall 2014. While this may be a temporary phenomenon following the rapid decline in the long-term yield observed after the expansion of QQE as well as the short- and medium-term yields turning negative, it may also reflect other factors such as the massive purchases of JGBs by the Bank of Japan, structural changes in the markets, and regulatory changes. These findings underscore the need to monitor liquidity in the JGB market continuously and from many sides, using various indicators. In addition, it is important to enhance dialogue with market participants, thereby carefully monitoring the market's view on liquidity, which does not show up in the aforementioned indicators.

JEL Classifications
C32, G12, G14

JGB market; market liquidity; transaction data; SC repo

The authors would like to thank the seminar participants at the Federal Reserve Bank of New York, the Federal Reserve Board, the Hitotsubashi University, and the International Monetary Fund, as well as the staff of the Bank of Japan, for their helpful comments and discussions. The authors are also grateful to Rii Asano for her help in writing this paper. The views expressed here are those of the authors and do not necessarily reflect the official views of the Bank of Japan. Any errors or omissions are the sole responsibility of the authors.

  •   *1 Financial Markets Department, Bank of Japan
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  •   *2 Financial Markets Department, Bank of Japan
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  •   *3 Financial Markets Department, Bank of Japan
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  •   *4 Financial Markets Department, Bank of Japan
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