This paper focuses on the structural change in the market for long-term interest rates in Japan before and after the Great East Japan Earthquake (Earthquake) by analyzing co-movement and transmission. Before the Earthquake, Japanese interest rate swaps and Tokyo Electric Power Company bonds moved together. On the other hand, Japanese government bonds and Japanese interest rate swaps moved together after it. There was no transmission among the three interest rates before the Earthquake. But after the Earthquake, there was transmission between Japanese government bonds and Japanese interest rate swaps. Therefore, it can be concluded that the market for long-term interest rates in Japan changed structurally after the Earthquake.

The Great East Japan Earthquake (hereinafter referred to as the Earthquake) of March 11, 2011 caused a lot of damage. In addition to the destruction caused by the tremor and subsequent tsunami (tidal wave), the devastation of the nuclear power plants in Fukushima dealt a serious blow to the power supply capacity of the Tokyo Electric Power Company. The concern that the company would be liable for the costs of disposing the shuttered nuclear power plant and that the compensation for the damages was widespread, prevailed in the financial market. Hence, the prices of the Tokyo Electric Power Company bonds declined sharply after the Earthquake, amid growing credit risk.

We usually refer to government bonds, interest rate swaps, and corporate bonds as benchmarks of long-term interest rates in Japan.1 Japanese government bond yields are supposed to be the lowest of the three interest rates because they bear the least credit risk. Swap rates are representative of credit risk in the banking sector. Corporate bonds are representative of the private sector other than banking. In other words, these three kinds of interest rates represent the benchmarks to indicate the cost of borrowing in each sector. The Earthquake might have had an impact on long-term interest rates in Japan because the yields of the Tokyo electric power company bonds rose sharply after the accident.

Applied Finance Journal, Great East Japan Earthquake, Impact on the Market, Long-Term, Interest Rates, Japan, Great East Japan Earthquake (Earthquake), Tokyo Electric Power Company, Augmented Dickey-Fuller(ADF), Phillips-Perron (PP)