Interest Rate Analysis
Introduction
The term structure of interest rates, similarly called the yield curve, is a popular bond valuation method. This method is created through graphing the yield to maturities and the maturity periods of set income securities, the yield curve is a measure of market projection of future interest rates using the prevailing market states. The treasuries that are issued by the federal authority are attributed to be safe and hence the yields are commonly used as benchmarks for fixed-income securities with similar maturities (Ichiue and Ueno, 2006). The term structure of interest rates is graphed like each coupon payment of non-callable fixed-income security was a zero-coupon bond that develops on the coupon payment period. This paper will focus on analysis of the interest rates of Japan in the period 2007 to 2013.
Background
Japan, among the biggest economy in the world, posted a successful growth as it develops from an adverse and extensive recession period. This was made possible by exports and the excessive stimulus expenditure by the government. The economy grew 1.2 percent in July to September from the initial quarter that recorded 4.8 percent on a yearly basis according to the government (Ichiue and Ueno, 2006). This was the most successful growth since January – March 2007 and much faster. The growth was set to continue with a continued stimulus impact and foreign demand.
The exports declined 6.4 percent from one quarter to another in July to September while the expenditure grew 1.6 percent and household spending went up 0.7 percent. This rebound succeeded severe contraction in Japan’s export based economy, which experienced double digit contractions in the last quarter of 2008 and at the start of 2009.
Analysts state that the most rigid performance was to some extent attributed to a temporary improvement in corporate inventory refilling and cautioned the quarter’s growth was expected to be stellar. According to Kyohei Morita, the country’s chief economist, even though the GDP was not that rigid, there is need to discount the good part played by the private inventories as it is not sustainable (Ichiue, and Ueno, 2006).
Japan went into recession in the second quarter of 2008 as the world’s economic drop beat the need for its motor vehicles, electronics among other products exported. The economy went back to its positive rise in April – June of 2009, growing 0.7 percent from one quarter to another, though there are issues the recovery could not handle like the decline in government efforts.
With the outdated and decline in population led to a decline in the stance of spending by the locals, Japan stays as the reliant as ever on other markets to control its growth even though the government promises stimulate local demand. The period from 2007 to 2009 showed a country that is steadily getting back on track with a decline in unemployment rate going down to 5.3 percent in September and the production by the factory increasing for consecutive months.
A recovery in foreign market need brought to exports growing greatly in the second half of 2009 and 2010. This using extensive government stimulus packages brought about GDP rise and acquiring most of the products lost in the recession in the middle of 2010.
Japan’s Bank, like a number of world’s major central banks, undertook a number of steps to assist stabilize confusion in the financial model, however, the issues were less problematic in Japan when compared to other countries like the UK and US. With the signs of a waning economy at the end of 2010, the Bank created a policy of ‘comprehensive monetary easing’. This involves bringing down the interest rate to be above 0% and focus to keep there until the price was stable.
The programme saw the return of QE, using the Bank of Japan making money and purchasing government debt initially acquired by financial institutions. While the additional finances acquired from selling these products to the Bank of Japan, it was projected that banks would be in a position to lend more to commercial activities and clients.
In 2011, the Great East earthquake and resulting tsunami that led to massive contraction in economic production using GDP declining by 2.6 percent in the start of 2011. After the destruction, the government started a 10 year reconstruction programme. Subsequent additional reconstruction expenditure was slated for about 25 trillion yen (Ichiue and Ueno, 2006). A rebound in GDP at the end of 2011 and start of 2012 allowed for technical recession in the middle 2012. With the closure of 2012 the country’s GDP was at 2.4% lower than it was in 2008-2009.
Prior years suffered a fall in economic growth arising from natural disasters, in 2012 major reconstructions and general economic ability of places not affect by the disasters. In the subsequent years, the country’s growth is bound to affect the country’s long term growth of beyond 1 percent.
In 2013 there was a strong growth in the first half though it declined due to exports and consumers. The decline at the rate of 1.9 percent in the third quarter from 3.8 percent in the previous quarter. The growth had been motivated by monetary and fiscal strength. Growth, according to Nikkei poll of economists projected a rise in the fourth quarter (Ichiue and Ueno, 2006). On a quarterly basis, the country’s economy went up by 0.5 percent from the prior three months.
A slow in economy places pressure to deliver more advanced effort to elevate the country’s future growth projection. The slowing in growth was due to a decline in net exports. The country’s projection for the fourth quarter is projected to increase due to government and consumer spending.
Reference
Ichiue, H. and Y. Ueno (2006). “Monetary Policy and the Yield Curve at Zero Interest: The Macro-finance Model of Interest Rates as Options.” Bank of Japan Working Paper Series, 06-E-14.
