Convenience yield on government bonds and unconventional monetary policy in Japanese corporate bond spreads

This paper examines the factors that contribute to credit spreads in the primary market for Japanese corporate bonds, especially when the Bank of Japan implemented unconventional monetary policy measures. The models of credit spreads based on the Treasury convenience yield hypothesis are estimated using an issue-level dataset. The results indicate that the factors to explain credit spreads changed under the unconventional monetary policy regime. Investors became less sensitive to the risk of default for issuers with different credit quality due to the unprecedented degree of monetary easing. The Japanese government’s debt-to-GDP ratio, which is a measure of the convenience yield on government bonds, is an important driver of credit spreads throughout the sample period.