The Interest Rate Swap Spreads and Monetary Policy in Japan

Abstract

This paper investigates the determinants of interest rate swap spreads in Japan by considering the difference of monetary policy regimes by the Bank of Japan (BOJ). Four determinants of swap spreads - corporate bond spread, TED spread, the slope of yield curve and volatility - are chosen. When the monetary policy was easing, swap spreads decreased as credit risk increased. When monetary policy was tightening, 10-year swap spread decreased in accordance with the increase of corporate bond spread. TED spread contributed to swap spreads positively in all maturities under tightening cycle of the monetary policy. Slope of yield curve contributed more actively to the swap spreads in all maturities in quantitative easing period and to the swap spreads of 5 years, 7 years and 10 years in tightening aspect. Volatility contributed more actively to the swap spreads in all maturities in easing phase.

Keywords: Swap spread, Credit Risk, TED Spread, Monetary Policy

JEL Classification: E43, E52