MSCI’s Oleg Ruban uses the Barra Integrated Model to run stress tests for the impact of rising Japanese Government bond yields on different asset classes in his study, “Stress Scenarios for Japanese Government Bond Yields: Insights from the Barra Integrated Model” of October 2013.

Rising Japanese Government Bond Yields: Barra Integrated Model

The tests were run in view of apprehensions that these rising yields could lead to chain reaction and impact Japanese, Asia-Pacific and Global bond and equity markets, affecting investors regardless of whether they held JGBs or not. This is because of the huge size of the JGB market, about one-third of all government debt outstanding.

What is the Barra Integrated Model (BIM)?

The model incorporates the result of a study of market-specific local models that include equity, debt, derivatives, commodities, currencies, and alternative asset classes, thereby revealing the local factors that create risk for that market. By combining these local models into a single all-encompassing risk model it is possible to study correlations and risk across markets – particularly useful for risk analysis of multi-asset class strategies mounted on a global or local scale.

Observations for Japanese bond yields

  • Japanese Government Bonds could lose about 7%, based on the Nomura BPI JGB Index, and assuming a rise in yields similar to that witnessed during the VaR turmoil of September 2003.
  • Japanese Corporate Bonds would be impacted depending upon the underlying cause of the rise in yields in JGBs. If the rise is due to better economic performance, corporate bond spreads would narrow. If financial market concerns, such as bank balance sheets, are the root cause of the rise in yields, credit spreads for the corporate sector would widen.
  • Japanese Equities, when correlating negatively with JGB yields, would gain 19%. In the alternative case, Japanese equities could lose 12% given a scenario where JGBs lost 7.25%.
  • In the Global Bond, Equity and Currency markets, the impact would be determined whether the rise in yields would be accompanied by a fall in Japanese equities or a rise. A falling Japanese equity market would have a dramatically adverse impact on equity markets in Asian Emerging Markets, particularly Indonesia, Philippines and Taiwan. Rising Japanese equities could push the ACWI IMI higher by up to 20%. Bond markets outside Japan would also rise or fall similarly with Japanese equities.


The underlying factors that cause the rise in Japanese Government bond yields influence how asset classes such as government bonds, corporate bonds and equities react. These factors cause Japanese equities to correlate either positively or negatively, and thereby affect domestic or global asset classes.