This paper empirically evaluates the validity of the term structure of interest rates in a low interest rate environment using high-frequency Japanese data. Allowing for the time-varying term premium, we obtain evidence that when interest rates are low and the short end of the term structure is studied, there is no evidence to support the term-structure relationship. This poor performance is attributed to little information in the interest rate spread that can be used to predict future economic activity and/or to the absence of the persistent term premium. In contrast, some evidence for the term-structure relationship is found when the long end of the term-structure data is considered during a relatively high interest rate period.
Keywords: Monetary policy; Zero interest rates
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.