Analysis of credit spread in Japan's corporate bond market

This paper analyses the determinants of variation in the yield spread (credit spread) between government bonds and corporate bonds in Japan's bond market after 1997. The authors conduct empirical tests on the relationship between credit spreads and several economic and financial variables. A key finding is that default risk and the overall financial situation in Japan were the most significant factors in explaining the credit spread. The ratio of corporate bond issuance to government bond issuance is also an important determinant of the spread, a result that preceding studies had been unable to either prove or disprove conclusively. Notably, some of the factors that market participants claim to focus on in their bond dealing activities, in particular duration risk and the crowding-out effects of higher government debt, did not appear to have a significant impact on credit spreads.