Report on “The Committee on Yen Risk-free-rate Model Estimation”

Takeaki KARIYA, Darrell DUFFIE, Mariko FUJII, Masaaki KIJIMA, Takao KOBAYASHI, Atsuyuki KOGURE, Robert MERTON, Akihiko TAKAHASHI, Keiichi TANAKA, Satoshi YAMASHITA
JEL codes: 
Policy Research Institute, Ministry of Finance The Committee on Yen Risk-free-rate Model Estimation

With the introduction of the international accounting standards in Europe and dissemination of LDI (Liability Driven Investment) as a new investment standard, the investor demand for super-long end has been rising also in Japan. Under these circumstances, it is required that the Japanese government, as the supplier of the Japanese Government Bond (JGB), a unique
yen-denominated risk-free asset, establishes a system in which new ultra-long-term bonds such as 40-year JGB can be issued flexibly. Such issues will contribute to the development of bond market and ALM (Asset Liability Management) of financial institutions.
On the other hand, proper attention should be paid to setting appropriate conditions for the issuance of new maturity government bonds without a secondary market so that neither investors nor taxpayers may be left in a disadvantageous position. Thus, the establishment of an interest rate estimation model is required for setting out such appropriate conditions. For the purpose of establishing the model from a neutral and professional point of view, this committee was set up at the Policy Research Institute and it consist of Japanese and foreign experts of finance, financial engineering, and statistics.