Monetary and Economic Studies Vol.24, No.S-1 / December 2006

Interpreting Recent Changes in the Credit Spreads of Japanese Banks

Jun Pan, Kenneth J. Singleton

This paper examines the recent period of relatively low credit spreads in Japan, with particular emphasis on the market's assessments of the credit risks of large Japanese banks implicit in the prices of credit derivatives. We extract the market-price implied likelihood of a credit event in the future, and explore the nature of the default risk premiums underlying recent changes in bank bond and credit derivatives prices. We document substantial increases in the "jump-at-default" default risk premiums for the large Japanese banks examined during the early part of 2006. These patterns in risk premiums are related to the recent patterns in market indicators of global event risk, local equity market volatility, and an estimate of the duration of the Bank of Japan's zero interest rate policy.

Keywords: Default risk premium; Credit default swap; Japanese banks; Zero interest rate policy; Event risk


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.

Copyright © 2006 Bank of Japan All Rights Reserved.

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