PRI Discussion Paper Series (No.20A-15)

Do fiscal policy news shocks affect JGB yield? Evidence fromCOVID-19
Corresponding author. Project Assistant Professor, University of Tokyo andVisiting Scholar, Policy Research Institute, Ministry of Finance, Japan

Takahiro Hattori
Visiting Scholar, Policy Research Institute, Ministry of Finance, Japan
Motoki Katano
December 2020

The views expressed in this paper are those of theauthors and not those of the Ministry of Finance or
the Policy Research Institute.

Research Department Policy Research Institute, MOF
3-1-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-8940, JapanTEL 03-3581-4111

Do fiscal policy news shocks affect JGB yield? Evidence fromCOVID-19*

Takahiro Hattori† and Motoki Katano‡
December 2020
Abstract
This is a pioneering study that investigates how fiscal news affects the yield of the Japanese
Government Bond (JGB), by using intraday data. Since the Japanese government is the largest
spender in the world, during the COVID-19 pandemic, this period provides the ideal situation orsetting to test how fiscal news affects JGB yield. Taking advantage of the minute by minute data
about fiscal news during this pandemic, we find that negative fiscal news significantly but
temporarily increased JGB yield, although it is not a persistent effect. We also find that investors
do care about negative news but not about the positive news. These results suggest that the JGB isconsidered a risk-free asset among investors, but the result also signals to the Japanese government
to work on sound management of debt sustainability from a long-term perspective.

JEL codes: E62, H62, H63
Keywords: Budget Deficit, Japanese Government Bond, Interest Rate, Fiscal News, COVID-19*

We would like to thank Makoto Hasegawa, Kengo Kameda, Hiroshi Morita, Wataru Sakata, Junji Ueda andthe seminar participants at Kansai public economics seminar and Ministry of Finance, Japan for their helpfulcomments. Motoki Katano handled the construction of the fiscal news index and section 2. Takahiro Hattori
owns the research design/idea and the other sections (Introduction and Sections 3-5). The views expressedherein are those of the authors and do not necessarily reflect the opinions of the organizations to which theauthors belong. Any remaining errors are the sole responsibility of the authors.
† Corresponding author. Project Assistant Professor, University of Tokyo and Visiting Scholar, Policy
Research Institute, Ministry of Finance, Japan. hattori0819@gmail.com.
‡
Visiting Scholar, Policy Research Institute, Ministry of Finance, Japan. motoki.fujimori@gmail.com
1

ノンテクニカル・サマリー

東京⼤学 公共政策⼤学院 特任講師、財務省 財務総合政策研究所
財務省 財務総合政策研究所

客員研究員

服部孝洋

客員研究員 ⽚野幹⽇本は⻑年財政⽀出が拡⼤し財政⾚字が累積する⼀⽅、⽇本国債の⾦利は総じて低迷している。そのため、⼀⾒すると財政⽀出と⾦利の関係には財政学の教科書にあるような正の関係（財政⽀出により⾦利が上昇するという関係）が⾒られない。もっとも、財政⽀出が拡⼤する時期は主に景気の悪化
局⾯であること、⽇銀による国債の買い⽀えや安全資産に対するニーズの増加局⾯でもあること等を踏まえると、財政⽀出と⾦利の時系列について単純にそれらの相関関係を⾒るだけで因果関係を指摘するのは不適切であり、財政⽀出が⾦利に対してどのように影響を与えたのかを推定するには⼀定の⼯夫が必要である。
本稿では、Covid-19 の経済対策として⾏われた累次の財政⽀出が⽇本国債の⾦利に与える影響について、財政⽀出に係るニュースデータを⽤いて、財政⽀出と⾦利の間にある因果関係を推論する。
本稿のアイデアは分刻みの⾦利データを⽤い、財政⽀出に係るニュースが報じられたタイミングで、⾦利がどのような動きをしているかを把握するというものである。市場が効率的であれば⾦利や先物価格に既存の情報は反映されていると解釈できる。そのため、新しい財政ニュースが出た瞬間に⾦利がどのように動いているかをみることで、財政ニュースが⾦利に与えている影響を把握することが可能になる。テクニカルには、財政⽀出に係るニュースが、市場関係者にとって新しい情報であるとすれば、ニュースと誤差項の相関はなく、財政が⾦利に与える効果について因果推論ができる。
本稿では令和 2 年度補正予算の議論が開始された 2020 年 3 ⽉以降のニュースデータを、Bloombergから特定化し、財政ニュース指数を構築したうえで、その指数と⾦利を⽤いた回帰分析を⾏う。財政
ニュース指数については Kameda (2019)による⼿法に則る。既存研究に対して、筆者らの研究は、先⾏研究の研究に対して、①⽇中のデータをベースに財政ニュースを活⽤しており、識別の点で改善がみられること、②経済学者や実務家に関⼼が⾼い Covid-19 の影響を分析しているという点で新規性を有する。
筆者らの発⾒は、①財政に対して負のニュースが出た場合、10 年⾦利が上がる（先物価格が下がる）ことを統計的に有意な形で⾒出したこと、②もっともその効果は⼩さく、その持続性も⼩さい可能性がある、という点である。その意味では、⽇本国債は安全資産として投資家に認識されていることを⽰す結果である。もっとも、財政に関する負のニュースが⾦利上昇に統計的に有意な影響を与えていることは、財政悪化に対して投資家は⼀定の懸念を⽰す結果と解釈することも可能である。

2

1.

Introduction
This paper challenges the classical issues which Japanese economists have long pursued. Does

fiscal deficit increase the Japanese Government Bond (JGB) yield? Economists have been warning
the government about the deterioration of the fiscal deficit and government debt levels, but
inexplicably, the JGB yield continues to decline. Especially after the 1990s, government debt
increased dramatically, and the debt to GDP ratio reached over 200%. One of the myths related to
the Japanese government deficit is the negative trend of the nominal interest in the JGB market
after the 1990s. Figure 1 shows the ten-year JGB yield and outstanding government debt, whichindicates that JGB yield continues to decrease even as public debt increases. If the JGB yieldreflects the default risk of JGBs, the increase of government debt should have increased the JGB
yield accordingly.
One of the mechanisms describing this paradoxical phenomenon relies on the endogeneity
between interest rates and government deficits. As Figure 1 shows, the Japanese government
deficit started to increase sharply from the 1990s, which coincided with the Japanese recession,
which earned it the moniker of, The Lost Decade. While the government faced a recession, it
stimulated the economy by increasing government spending. Simultaneously, to boost theeconomy, the Bank of Japan (BOJ) also cut interest rates which exerted negative pressure on thenominal interest rate. Therefore, it is not surprising that the JGB yield declines while thegovernment continues to increase government deficit in conjunction with the BOJ’s
accommodative monetary policy.
To challenge this endogeneity, we use high-frequency data and fiscal news to detect the causal
relationship between JGB yield and fiscal deficits. By utilizing high-frequency data and surprise,3

many papers have attempted to study and detect how the asset price reacts to new information
releases (see Hashimoto and Ito (2010)). If we construct the fiscal news minute by minute, we candetect how the ten-year JGB yield has responded to fiscal news. In terms of monetary policy, theBOJ announces the detailed schedule of purchasing JGBs under the Quantitative and Qualitative
Monetary Easing, in advance; therefore, information related to monetary policy should be
immediately impact the ten-year JGB yield on the assumption of market efficiency.1 In otherwords, if the JGB yield responds immediately to the fiscal news, we can identify this response to
be caused by the fiscal news, not by the news on monetary policy.
Following Kameda (2019) to construct the fiscal news index, we regress the ten-year JGB yield
to the fiscal news index. We find that negative fiscal news has a positive (negative) effect on theten-year JGB yield (JGB futures price), which is consistent with previous studies such as Kameda(2014, 2019). Our result indicates that investors do care about the fiscal condition for pricing JGB,
which is a warning for the Japanese government to soundly manage their debt sustainability.
Conversely, since negative fiscal news does not have a persistent effect on the ten-year JGB yield(JGB futures price), this result suggests that investors currently consider JGBs as a risk-free asset.
Moreover, we find that the negative news increases the yield but the positive news does not affectit, suggesting that the investors only care about or react to negative news.
For constructing the fiscal news index, we use the fiscal events during the COVID-19 pandemic.
As a matter of fact, Japan is the largest fiscal spender in the world during this period. In this respect,
the COVID-19 period provides an ideal opportunity to explore how much fiscal shock affects the
JGB yield. It was not easy, but we successfully obtained the intraday data of the ten-year JGB yield1

See Hattori (2020) for detail about Quantitative and Qualitative Monetary Easing.
4

during this period from Bloomberg.
Our result is robust even when we include controlling variables. Especially controlling for stock
prices is vital—even if government spending increases JGB yield, investors might interpret thatthe fiscal expansion will positively affect the Japanese economy—therefore, this might increaseinflation expectation. To control this effect, we include the intraday data of stock return.
Specifically, if investors interpret the government spending as measures to improve the economy,
this will also increase stock prices. We show our result to be robust even when we include stock
return as the control variable.
Literature Review: There are many papers which discuss the relationship between fiscal deficit
and interest rates. The early studies (Plosser (1982), Evans (1985, 1986)) discuss deficits that cause
lower interest rates, which is theoretically a surprising result. One strand of the literature focuses
on media-reported budget news. By taking advantage of the expectation of the Congressional
Budget Office (CBO), Wachtel and Young (1987) find that the announcement of fiscal deficits
increases interest rates in the US. Quigley and Porter-Hudak (1994) study over 300 deficit project
reports contained in the Wall Street Journal to expand on the work of Wachtel and Young (1987)
and conclude that the fiscal deficit causes an increase in interest rates. Kitchen (1996) shows
similar results, while also showing that the deficit effect is transmitted internationally with foreign
long-term interest rates, which also rise in response to the announced increases in US deficit
projections.
Compared to the literature using US data, there are fewer papers focusing on the relationshipbetween the fiscal news and interest rates in Japan. Nakazawa (2002) points out that government
deficits significantly affect long-term interest rates by using VAR methodology. Onji et al. (2012)5

show that the presence of the Japanese public sector as a large stable investor in JGBs, exerts astabilizing influence on private JGB traders, and the default risk of JGBs is negligible. Kameda(2014) uses the event study methodology and finds that a percentage point increase in both the
projected/current deficit-to-GDP ratio and projected/current primary-deficit-to-GDP ratio, raise
real ten-year interest rates by 26–34 basis points. The work of Kameda (2019) is most closely
related to our study and it constructs the daily based news index to show a negative relationshipbetween the ten-year JGB yield and the fiscal news index.
The difference between previous studies and our study is threefold. First, we use intraday data
to discuss the relationship between fiscal conditions and nominal interest rates. As described
previously, an intra-day analysis is essential for capturing the causal relationship. We show results
consistent with previous studies; therefore, our paper reinforces the literature. Second, we find that
fiscal news significantly affects the rate of change of the ten-year JGB yield (return of JGB futures
price), although Kameda (2019) pursues the long-run relationship between fiscal news and thelevel of the ten-year JGB. In most studies based on news or surprise, the economist uses the returnon the financial asset (instead of the price level of the financial asset) as the dependent variable;
thus our study utilizes the standard model to detect and evaluate the relationship between the fiscal
deficit and interest rates. Third, to the best of our knowledge, this is the first empirical researchthat investigates fiscal policy during the COVID-19 pandemic. Considering the persistence of thepandemic, the Japanese government might pursue additional government spending; therefore, ourresult provides policy implications for the financing of that expenditure by issuing additional JGBs
to stimulate the economy.
The remainder of this paper is organized as follows. Section 2 describes the institutional
6

background and fiscal news data. Section 3 discusses the model and our data. Section 4 shows theempirical results and robustness checks. Section 5 concludes.

2.

Institutional background and fiscal news data

2.1 Japan’s government spending to cope with COVID-19
First, we describe the government budget process in Japan. The Constitution and the Public
Finance Law provide the principles for the budget compilation process. Each initial budget mustbe suggested and decided by the cabinet and then approved by the Diet for every fiscal year, whichruns from April 1 to March 31. The government can revise the initial budget during the fiscal year,
and this supplementary budget has to be adopted by the Diet as well. Figure 2 is a simple depictionof the supplementary budgets process. Following the Prime Minister’s declaration, the draft budget
is sent for compilation by the Ministry of Finance, which is the general authority for budget
formulation in place of the cabinet. Afterwards, it is approved and submitted as a bill to the Dietby the cabinet. Then, the House of Representatives (Lower House) discuss the bill and pass it to
the House of Councilors (Upper House) for further discussion. After the Upper House passes thebill, the budget is finally enacted (Doi and Ihori, 2009).
Due to the nationwide spread of COVID-19, Prime Minister Abe declared a state of emergency
on April 7 for Tokyo and six other prefectures and later extended it to the whole nation. The
government requested people to stay home and for nonessential businesses to suspend operations,dealing a harsh blow to the economy. The state of emergency was lifted fully on May 25, 2020 and
unfortunately, many areas have since seen a resurgence in infection rates.
The COVID-19 crisis has already delivered various shocks to Japan. Fukui et al. (2020) and7

Kikuchi et al. (2020) have argued the impact of COVID-19 on the labor market. Miyakawa et al.
(2020) quantified firms' potential exits and the additional measures required in response to
COVID-19. From the perspective of consumption, a detailed study on increasing online
consumption was made by Watanabe and Omori (2020).
As Ando et al. (2020) showed in detail, Japan’s government enacted two consecutive
supplementary budgets for FY2020 in response to COVID-19, which focused on supporting firms,
workers, and households, and then shifted to long-run support for business and healthcare services.
They consist of urgent comprehensive grants for health and medical services, subsidies for
employment protection and business continuity, cash transfer for residents, etc.
We should highlight the three largest fiscal measures, financial support of firms, the Special
Cash Payment and contingency funds for COVID-19; the amount of which is approximately 70%of the two supplementary budgets. First, the government enhanced financial support for small andmedium-sized enterprises that were badly affected by this emergency, totaling about 15.5 billion
yen. Second, the Special Cash Payments with a budget of around 12.9 billion yen, was an
unconditional cash transfer of 100,000 JPY per Japanese resident. Third, 11.5 billion yen was
allocated to reserves for an emergency fund, from which the cabinet can flexibly spend, but withsubsequent approval of the Diet for all payments. The supplementary budget also included benefits
for small businesses, at risk of permanent closure with a budget of about 6.3 billion yen, a special
grant for revitalization of regions with a budget of 3 billion yen, and the Comprehensive Support
Grant for healthcare with a budget amounting to over 2.9 billion yen.2
As mentioned above, the supplementary budgets for the stimulus policy were adopted in a short

2

See Fiscal System Council, the presentation on October 1, 2020 (in Japanese)8period. The detailed schedule of the first and second supplementary budget processes are shownin Figure 3, which should be compared with Figure 2. The general flow of the process is almost
the same between both supplementary budgets, however, it should be emphasized that the firstsupplementary budget draft was changed after the cabinet decided on it, and it was finally approvedon April 20.3

2.2 The fiscal situation during COVID-19
Here we examine the current fiscal situation in response to COVID-19 in Japan. The firstsupplementary budget is worth 25.7 trillion yen, and the second is 31.9 trillion yen within a shortperiod, which in total is the largest scale intervention since 1945. In combination with a part of themain budget, the total spending exceeded 230 million yen in scale, which is an unprecedented 40
percent of GDP, the most extensive worldwide. 4 Figure 4 summarizes the international
comparison of the scale of government spending in response to COVID-19 among the G5 countries
at the end of May 2020, showing that Japan was the largest spender. With respect to revenues,
however, as is well known, Japan’s fiscal condition is the worst among the developed countries.
This time, all the supplementary budget expenditures are covered by JGBs, named the special
deficit-financing bond (deficit bond). Hence, the bond dependency ratio, defined as the ratio ofgovernment bond issues to total expenditures in the annual general accounts, reached 56.3% in
FY2020. In Figure 5, it is clearly observed that the gap of expenditure and revenue lines, which
3

The composition of the budget was changed because some members in the ruling party demanded a special
cash payment of 100,000 yen, once after cabinet approved the draft budget on April 7.
4
It includes not only expenditures in supplementary budgets expenditure but also liquidity support surpassing
130 trillion yen, such as subordinated loans or investment from the Development Bank of Japan, and loans thatare interest free in real terms with principal repayment deferred for a maximum of five years from local andgovernment banks.
9mostly equals the quantity of bond issuance, has been gradually widened, and there is a marked
increase in FY2020, including the first and second supplementary budgets.
From the above, two critical points become very clear. One is that Japan’s spending against
COVID-19 is the largest scale globally. The other is that such huge expenditures were made,depending entirely on issuing government bonds, and this impacted the JGB market. This setting
therefore provides an ideal opportunity to explore how much fiscal shock affects the JGB rate.

2.3 Fiscal news data
To construct the fiscal news index, we follow Kameda (2019), who employs daily data from themorning and evening editions of the Nikkei Telecon 21. The limitation of Kameda’s (2019) study
is that it captures the effect of fiscal news on JGB yield on a daily basis. However, a variety ofnews is released each day; therefore, if we use daily news, the impact of non-fiscal news may also
be reflected in the asset price.
To overcome this issue, we selected Bloomberg as the source of fiscal news. Bloomberg
assembles the news from a variety of sources, including major newspapers such as Nikkei, which
is known as the largest financial newspaper in Japan. Moreover, this source also includes
Bloomberg News, which is widely recognized by institutional investors.5 The greatest benefit ofusing Bloomberg is that this source provides minute by minute news and updates. Since printed
newspaper articles are issued only in the morning and evening, this traditional source cannot
capture updated news in real-time. As far as we know, this study is the first to utilize minute byminute fiscal news data to investigate the impact of fiscal shock on JGB yields.
5

At the end of 2019, private investors held a small share of JGB, only 1.2%. Therefore, we can focus on theway market participants obtain information.
10

The methodology of the fiscal news index
To construct the fiscal news index, we follow the methodology proposed by Kameda (2019).
Kameda (2019) constructs the fiscal news index based on the number of positive and negative
articles. Since Kameda (2019) uses the daily based index, he first judges what article is positive or
negative for the fiscal condition of the Japanese government; then the fiscal news index is definedas the number of positive articles minus the number of negative articles. Following the same idea,
we construct the fiscal news index as follows:

Fiscal News Index

1 if the fiscal news is positive
1 if the fiscal news is negative

Fiscal News Index

When the fiscal news is positive for the fiscal condition of the Japanese government, the fiscal
news index takes 1. On the other hand, when the fiscal news is negative for the fiscal condition,
the fiscal news index takes

1. When there is no fiscal news, this index takes zero.

Keywords for the fiscal news index
To find fiscal news, we searched for the relevant headlines from March to July in 2020, toconstruct the database for a fiscal shock in Japan. To collect the news from the headlines, we use
the following keywords:(i)

Keizai-Taisaku (Economic Measures)(ii)

Kinkyu-Taisaku (Emergency Measures)
11

(iii)

Kyufu-Kin (Benefits)(iv)

Yobi-hi (A Reserve Fund in the National Budget)(v)

Hosei-Yosan (Supplementary Budget)

Conversely, we drop irrelevant news data based on the following criteria:(a) Fiscal news which is not related to Japan;(b) News from curation sites such as “Yahoo! News” or “Livedoor News”;(c) Market comments from economists or financial analysts, who are not politicaldecision-makers;(d) Duplicate data from the same media.
Figure 6 shows the number of fiscal news headlines from March to July. The remarkable featureof this index is the capability to successfully capture the two supplementary budget processes,
especially around the critical event schedule described in Figure 5. In addition, the severity of the
COVID-19 impact on the Japanese economy is fluctuating, and new decisions are taken minute byminute by the Japanese government. Therefore, as Figure 7 describes it, we emphasize that the
fiscal news was released anytime during the 24 hours of a day. Since we capture fiscal news during
the night as well, our analysis relies not only on ten-year JGBs but also JGB futures, which aretraded at night.

3.

Model and data

3.1 Model
To detect how fiscal news affects the JGB market, we estimate the following regression:

12

α

β∙

.

(1)

is the difference of ten-year JGB yield and the return of JGB futures.
news index which we describe in section 2.2.

is the fiscal

is an error term.

To capture the persistence of the news effect, we conduct the regression separately over 1-, 5-,15-, 30-, and 60-minute windows in equation (1).

is the 1-, 5-, 15-, 30-, and 60-minute returnof the ten-year JGB yield and JGB futures.
To check whether good or bad fiscal news has a heterogeneous effect on the return of ten-yearyield and JGB futures, we use the equation as below:

β∙

γ∙

.

(2)

is the dummy variable when the fiscal news is positive.

is thedummy variable when the fiscal news is negative.6
Fiscal news could affect the JGB price through different channels. Especially, when thegovernment increases spending for stimulating the economy, this could positively affect themacroeconomy. This could increase economic growth and expected inflation, which hikes thenominal interest rate. To control this effect, we include

α

6

β∙

The constant term is dropped to avoid multicollinearity.
13

in equation (1) as below:

γ∙

.

(3)

We include stock return as a control variable. If the investors interpret that government spending
will boost the economy, the stock price should increase; therefore, this variable can capture theaspect of economic growth and expected return. We also control the foreign exchange rate
(USD/JPY) for robustness.

3.2 The data
Our data source is based on Bloomberg as mentioned in section 2.3. It is usually very difficult
to obtain intraday data on the JGBs, which are traded in the over-the-counter market. However,Bloomberg provides intraday data for ten-year JGBs, and also preserves the data for short periods.
The data from Bloomberg only covers timings of 9:00 to 17:00 for ten-year JGBs; therefore, wecannot capture the minute by minute response of ten-year JGBs to fiscal news released in thenighttime. On the other hand, JGB futures are traded in the night. For JGB futures, the night session
is from 15:30 to 5:25 (the next day). Therefore, we use the return of JGB futures as our main
analysis. We also use the intraday data of ten-year JGBs.
We match the difference of the ten-year JGB yield with the time of the fiscal news release. For
ten-year JGBs, we cannot obtain data from 17:00 till 9:00 the next day, so we use the difference of
ten-year JGB from 17:00 till 9.00 the next day, when the fiscal news are released. For JGB futures,
we use the return of JGB futures from (1) 8:45 to 11:00, (2) 12:30 to 15:00 and (3) 15:30 to 5:00,
which gives maximum coverage.
We also obtain the intraday data of stock return and foreign exchange from Bloomberg. We use
Nikkei 225 Futures as the Japanese stock index and USD/JPY as the foreign exchange rate. We
use Nikkei 225 Futures instead of TOPIX or Nikkei because the futures market opens much longer
14than Nikkei 225 and TOPIX. Nikkei 225 futures are traded during (1) 8:45-15:15 and (2) 16:305:30. Foreign exchange transactions are conducted in an over-the-counter market; therefore, it istraded 24 hours.
We also rely on Bloomberg to capture the minute by minute news. This source includes manyother media with Bloomberg's original news. Table 1 shows the information about the fiscal news
index. This table shows that the mean of the fiscal index is -0.9077, which suggests about 90% of
the fiscal news was negative toward the fiscal condition. This is quite natural because our data
covers the period of COVID-19.

4.

Empirical result

4.1 Main result
Baseline estimation based on equation (1)The regression results based on equation (1) are presented in Table 2. Column (1) in Table 2
provides the result of the regression of 1-minute return of ten-year JGB yield on the fiscal news
index and shows that the coefficient of the fiscal news index is negative and statistically significant
at the 5% level. This implies that negative news significantly increases the ten-year JGB yield.
Columns (2), (3), (4) and (5) in Table 2 show the estimation results when we use different
intervals of change of the ten-year JGB yield. In Column (2), the dependent variable is the 5minute return of ten-year JGB, which indicates that fiscal news significantly affects the 5-minutereturn of ten-year JGB at the 10% level. However, Column (5) shows that the fiscal news does not
significantly affect the 60-minute return of ten-year JGB, therefore fiscal news does not have apersistent or consistent effect.
15

Table 3 shows the estimation result when we use the return of JGB futures. Column (1) provides
the result of the regression of 1-minute return of JGB futures on the fiscal news index, which showsthat the coefficient of the fiscal news index is positive and statistically significant at the 10% level.
This implies that negative news significantly drops the return of JGB futures. This is a consistent
result in Table 3 since the JGB futures price and yield move inversely. Column (2) to (5) show that
fiscal news does not have a significant effect, which is also a consistent result in Table 3.
We also check the credibility of the fiscal news data by checking whether fiscal news affects thereturn 1-, 2-, 3-, 4-, and 5-minutes before the fiscal news releases. If we see a significant
relationship, it may indicate that this fiscal news may have been leaked before the media release.
We describe the regression result in the Appendix, but we have no significant relationship except
in the 1-minute before case, which suggests no leaked information about our fiscal news index.
Please refer to the Appendix for details.

The estimation based on equation (2)To check the heterogeneous effect of good and bad fiscal news, we use equation (2) for theestimation. Table 4 shows the estimation result. The dependent variable is the return of ten-yearyield shown in the upper panel (i) of Table 4. This result shows that good fiscal news does notaffect the return of the ten-year JGB, but bad fiscal news has a positive and significant effect on
the return of ten-year yield at the 1% level (except 15-minute return). This result suggests thatinvestors care only about negative news.
This result is consistent when we use the return of JGB futures as the dependent variable shownin the lower panel (ii) of Table 4. This table shows that bad fiscal news has a negative and16significant result on the 1-minute return of JGB futures at the 1% level while good fiscal news
does not have significant results. Bad fiscal news has a negative and significant result on the 5minute return of JGB futures at a 10 % level, although it does not affect 15-, 30-, and 60-minutereturns, which is consistent with the result of equation (1).

4.2 Robustness
For robustness checks, we conduct regressions with the control variables: stock return and thechange in foreign exchange rates. As described above, fiscal news could increase the nominal yield
because of the positive effect on the Japanese economy, such as the rise of inflation expectation.
Since our analysis is based on intraday data, we add stock return and change as control variables
using minute by minute data, in equation (3).
Table 5 shows the estimation result with control variables using ten-year JGB yield as adependent variable. Column (1) in Table 5 shows the baseline result with a 1-minute return of tenyear JGB. Column (2) shows the estimation result when controlling the return on foreign exchange,
where fiscal news negatively and significantly affects the return of ten-JGB yield at a 5% level.
The foreign exchange rate (JPY/USD) has a significantly negative effect on the JGB yield;
therefore, when the JPY appreciates, the ten-year JGB tends to increase. Column (3) shows theresult when we control for the returns on Nikkei 225 futures, indicating that fiscal news negatively
and significantly affects the return of ten-JGB yield at a 1% level. This column also suggests thatstock return does not have a significant effect on ten-year JGB yield. Column (4) shows the resultsof controlling the return of foreign exchange and Nikkei 225 futures simultaneously, which is still
significant at a 10% level. In this case, stock return has a significant positive effect on the ten-year
17

JGB yield; this suggests that the positive effect on the Japanese economy hikes the ten-year JGB
yield. Overall, this result is consistent with our baseline result.
Table 6 shows the estimation result with the control variables, when we use the return of JGB
futures as a dependent variable. This result is also consistent with our baseline result. Column (1)shows the baseline result when we use the 1-minute return of JGB futures. Colum (2), (3), and (4)indicate the result with the control variables. Especially, Column (3) shows that stock return has anegative and significant effect on the return of JGB futures. This implies that the proxy of the goodcondition of the Japanese economy has reduced the return of JGB futures and this is consistent
with our prediction. Although Column (3) shows an insignificant result, fiscal news has a positiveand significant effect on the return of JGB futures at the 10% level.

5.

Conclusion
The Japanese government suffers from severe fiscal deficits, but the ten-year JGB yieldcontinues to decline. Economists have even warned the government about the deterioration of
fiscal deficit and government debt levels, but the ten-year JGB yield inexplicably continues todecline. Especially, after 1990, the BOJ has tried to lower nominal interest rates, but the ten-year
JGB yield still tends to decline while the government stimulates the economy by increasing thegovernment fiscal deficit.
To challenge this relationship, we had to use high-frequency data with fiscal news. Since theJapanese government is the largest spender in the world during the COVID-19 pandemic, thisperiod is an ideal situation to test how fiscal news affects the JGB yield. Taking advantage ofminute by minute fiscal news data during this pandemic, we conduct a detailed study to answer
18this question.
We find that negative fiscal news significantly but temporarily increased JGB yield. This result
suggests that the JGB is considered as a risk-free asset among the investors, but since the result issignificant; we would also recommend to the Japanese government to soundly manage their debt
sustainability from a longer perspective.

19

Appendix
There is a possibility that investors are aware of the fiscal news before Bloomberg releases it.
Therefore, we use the 1-minute return of JGB futures, 1-, 2-, 3-, 4-, and 5-minutes before the fiscal
news release. We only use the return of JGB futures because we can match the minute by minutereturn perfectly with the data of JGB futures.7 Table 7 shows the estimation result. We have asignificant result when we use the 1-minute return of JGB futures, 1-minute before the fiscal news
is released. This may partly be because Bloomberg news has a delay of capturing the original news
data. When we use the 1-minute return of JGB futures, 2-, 3-, 4-, and 5-minute before the fiscal
news released, we have insignificant results. This suggests no leak of information before the news
releases.

7

As we describe in section 3.2, we cannot obtain data from 17:00 to 9:00 (next day), so we use the differenceof the 10-year JGB from 17:00 to 9:00 (next day) when fiscal news is released from 17:00 to 9:00 (next day).
Therefore, a lagged return makes no sense when we use 10-year JGB return especially when the news isreleased after 17:00.
20

References[1]. Ando, M., Furukawa, C., Nakata, D., Sumiya, K. 2020. Fiscal Responses to the COVID19 Crisis in Japan: The First Six Month. National Tax Journal 73(3), 901-926.
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22

Figure 1. Trends of JGB Issues（trillion yen）

（trillion yen）
10％

964

The Amount of JGB(right axis)
Interest Payment(left axis)

887
874
853
831
805

JGB Rate(left axis)

8％ 20
7.4

7.6

7.4 7.5

7.4
7.1

7.2

7.6 7.5

744

7.2

705

6.8
6.5

6.3

6.2 6.1

636
6.1

594

5.8
5.4

499
4.6

10.8

500

457

10.8
4.310.6
421
10.2
10.5
10.0
9.7
11.0
10
392
10.710.7
10.6
10.4 10.6
8.7
4.0
8.6
368
8.6
3.5
8.3 8.3 8.2
8.1 8.0 8.1
7.9 7.8
9.4
332
7.8
7.7 7.9
7.7
7.6
7.6
7.4
3.1
7.3
7.0 7.0
295
2.7
6.6
258
245
2.3
5.6
225
207
2.0
193
4.4
5
1.7
1721781.5161166157
1.41.41.4 1.4 1.4145152
3.3
1.31.2134
122
1.21.21.11.11.0
2.6
110
1.0 0.9 0.9
96
1.9
82
71
1.3
56
43
0.8
32
22
15
10.5

0％

10.8

600

541546527532

5.1

2％

700

670

6％ 15

4％

1975

1980

900

800

774
7.4

1000

1985

1990

10.7

1995

2000

2005

2010

2015

400

300

200

100

0
2020
（FY）

Note: JGB includes “Construction Bonds,” “Special Deficit-Financing Bonds,” and “Reconstruction Bonds.”
Source: Ministry of Finance, “Financial Statistics in Japan” (in Japanese).

23

Figure 2. Process of the Supplementary Budget24

Figure 3. The Actual Schedule of Supplementary Budget for FY2020

Source: Bloomberg

25

Figure 4. The Scale of Government Spending on COVID-19 Among the G5

Source: Fiscal System Council, presentation on June 1, 2020 (in Japanese)26

Figure 5. Expenditures and Revenues in the General AccountNote: “Government Bond” includes “Construction Bonds” and “Special Deficit-Financing Bonds.”
Source: Ministry of Finance, “Financial Statistics in Japan” (in Japanese)27

Figure 6. The Number of Fiscal News Headlines

Note: This figure shows the number of fiscal news headlines obtained by Bloomberg. This data is based onminute by minute investigation and showed that fiscal news is concentrated on each day of the critical budget
process: Prime Minister’s declaration on March 28 and May 14, decision of the budget draft by the Cabineton April 7 and May 27, decision and presentation of the changed draft by the Cabinet on April 20, andenactment of the budget on April 30 and June 12.
Source: Bloomberg

28

Figure 7. Comparison between Headlines during Daytime and Nighttime

Note: This figure shows the number of fiscal news headlines during daytime and nighttime, obtained byBloomberg. This data is based on minute by minute investigation and showed that fiscal news is concentrated
on each day of the critical budget process
Source: Bloomberg

29

Table 1. The information of the fiscal news index
(i)

(ii)

The fundamental statistics about the fiscal news index

Mean

MedianStd. Dev.

Observations-0.9077-10.41991018

The fiscal news index and JGB return (JGB futures return)
1-min

5-min

15-min30-min60-minfiscal news(negative)

0.000268

0.000267

0.000163

0.000407

0.000734

fiscal news(positive)-0.000149-0.000149-0.000170-0.000596-0.000553

fiscal news(negative)-0.000014-0.000017-0.000021-0.000024-0.000071

fiscal news(positive)

0.000035

0.000039-0.000027

0.0001520.000105

Ten-year JGB

JGB futures

Note: This table shows the fundamental statistics of the fiscal news index.

30

Table 2. Estimation result: Ten-year JGB

fiscal news

1-min

5-min

15-min

(1)

(2)

(3)

-0.0002190 ***(-3.31)

Constant-0.0001750 *-0.0004030 *(-1.82)30-min60-min(4)(5)-0.0005250 **-0.0006750(-1.71)(-2.06)(-1.54)0.0000697

0.0000045-0.0002570-0.0000703

0.0001210(1.06)(0.05)(-1.09)(-0.28)(0.28)

R2

0.00

0.00

0.00

0.00

0.00

obs

1018

1018

1018

1018

1018

Note: This table shows the regression result based on eq. (1). The dependent variable is the return of ten-year JGB
yield. The independent variable is the fiscal news index. The period is from March 2020 to July 2020. T-statistics arein parentheses, *, ** and *** stand for 10%, 5% and 1% significance, respectively. Standard error is adjusted basedon White (1980).

Table 3. Estimation result: JGB futures
1-min

5-min

15-min

(1)

(2)

(3)

0.0000276-0.0000031(1.86)(1.58)(-0.15)(1.71)(1.52)

0.0000104

0.0000110-0.0000240

0.0000637

0.0000171(0.80)(0.63)(-1.12)(1.24)(0.29)

R2

0.00

0.00

0.00

0.00

0.00

obs

462

462

462

462

462

fiscal news

Constant

0.0000245 *

30-min60-min(4)(5)

0.0000879 *

0.0000883

Note: This table shows the regression result based on eq. (1). The dependent variable is the return of JGB futures. The
independent variable is the fiscal news index. The period is from March 2020 to July 2020. T-statistics are inparentheses, and *, ** and *** stand for 10%, 5% and 1% significance, respectively. Standard error is adjusted basedon White (1980).

31

Table 4. Estimation result: good fiscal news and bad fiscal news(i)ten-year JGB yield

good fiscal news

bad fiscal news

1-min

5-min

15-min(1)(2)-0.0001490(-1.28)0.0002880 ***(4.64)

30-min60-min

(3)

(4)

(5)

-0.0001490-0.0001700-0.0005960-0.0005530(-1.28)(-0.96)(-1.20)(-0.66)0.0001790 **

0.0004550 ***0.0007960 ***(2.36)(3.69)(3.18)

0.0002870***(4.62)

R2

0.00

0.00

0.00

0.00

obs

1018

1018

1019

1020

1021

1-min

5-min

15-min30-min60-min

(1)

(2)

(3)

(4)

(5)

0.0000349

0.0000386-0.0000271

0.0001520

0.0001050(1.35)(1.16)(-0.69)(1.53)(1.01)-0.0000209-0.0000243-0.0000712(ii)

JGB futures

good fiscal news

bad fiscal news

-0.0000140 ***-0.0000166*(-3.23)(-1.66)(-1.19)(-0.95)(-1.40)

R2

0.00

0.00

0.00

0.00

0.00

obs

462

462

462

462

462

Note: This table shows the regression result based on eq. (2). The dependent variable is the return of JGB futures. The
independent variable is the fiscal news index. The period is from March 2020 to July 2020. T-statistics are inparentheses, and *, ** and *** stand for 10%, 5% and 1% significance, respectively. Standard error is adjusted basedon White (1980).

32

Table 5. Estimation result with controls: ten-year JGB

fiscal newsa(1)
-0.0002190 ***(-3.31)ΔJPYUSDb(2)-0.0001370 **(-2.08)-2.77272 ***(-11.93)

ΔNKY
Constant
R2
obs

c
(3)
-0.0002180 ***(-3.32)0.00007(1.06)
0.00
1081

0.00007(1.00)
0.40
1081

d
(4)
-0.0001410 *(-1.98)-2.87374 ***(-13.27)-0.03286(-0.54)0.22759 ***(3.36)

0.00007(1.09)
0.00
1081

0.00005(0.71)
0.41
1081

Note: This table shows the regression result based on eq. (3). The dependent variable is the return of ten-year JGB
yield. The independent variable is the fiscal news index. The period is from March 2020 to July 2020. T-statistics arein parentheses, and *, ** and *** stand for 10%, 5% and 1% significance, respectively. Standard error is adjusted
based on White (1980)

Table 6. Estimation result with controls: JGB futures

fiscal newsa(1)
0.0000245 *(1.86)ΔJPYUSDb(2)
0.0000249 *(1.94)-0.06717(-3.80)

ΔNKY
Constant
R2
obs

c
(3)
0.0000152(1.56)

0.00001(0.80)
0.01
462

0.00001(0.89)
0.03
462

d
(4)
0.0000165 *(1.72)-0.05098(-2.41)-0.01743 ***(-3.01)-0.01167 *(-1.79)0.00000(0.28)
0.03
462

0.00000(0.39)
0.04
462

Note: This table shows the regression result based on eq. (3). The dependent variable is the return of JGB futures. The
independent variable is the fiscal news index. The period is from March 2020 to July 2020. T-statistics are inparentheses, and *, ** and *** stand for 10%, 5% and 1% significance, respectively. Standard error is adjusted basedon White (1980)

33

Table 7. Estimation result: Lagged return of JGB futures
4-min lag5-min lag

(3)

(4)

(5)

-0.0000091

0.0000055

0.0000105

0.0000073(-1.97)(-0.82)(0.71)(0.82)(0.93)-0.0000067-0.0000104

0.0000024

0.0000085

0.0000083(-1.03)(-0.93)(0.31)(0.66)(1.05)

R2

0.00

0.00

0.00

0.00

0.00

obs

462

462

463

464

465

fiscal news

Constant

1-min lag2-min lag

(1)

(2)

-0.0000127 **3-min lagNote: This table shows the regression result based on eq. (1). The dependent variable is the return of JGB futures. The
independent variable is the fiscal news index. We use the 1-minute return of JGB futures 1-, 2-, 3-, 4-, and 5-minutes
before the fiscal news was released. The period is from March 2020 to July 2020. T-statistics are in parentheses, and*, ** and *** stand for 10%, 5% and 1% significance, respectively. Standard error is adjusted based on White (1980)

34