We empirically examine the factors affecting Japanese bond spreads. We compare banks’ investing activities during the Japanese financial crisis of the 1990s with the global financial crisis of 2008. Our results show that during the 1990s, focusing on liquidity risk, bond spreads were affected by market liquidity and funding liquidity and during the 2008 crisis only by market liquidity. However, when the bond-issuing market was stopped temporarily, banks faced heavy loan funding needs. Banks transferred assets from illiquid corporate bonds to highly liquid government bonds. This phenomenon was flight to liquidity caused not only by a need for market liquidity but for funding liquidity.
JEL Codes: G24, G12, and G38
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