Inflation-Indexed Bonds (JGBi)
Structure, pricing, and trading of Japanese Government Inflation-Indexed Bonds
Japan's CPI: The Foundation of JGBi
Before understanding inflation-indexed bonds, we must understand Japan's Consumer Price Index (CPI) — the economic indicator that drives every JGBi payment.
Japan's Inflation Journey
The Lost Decades (1991-2012): Japan struggled with persistent deflation — falling prices that discouraged spending and investment. The CPI frequently declined year-over-year, making inflation-indexed bonds unattractive.
Abenomics (2013-present): Prime Minister Shinzō Abe launched aggressive monetary easing to achieve a 2% inflation target. The Bank of Japan began massive bond purchases (including JGBs), and JGBi issuance was revived with a critical feature: the deflation floor.
Three Flavors of CPI
Japan's Statistics Bureau (stat.go.jp) publishes three distinct measures of inflation, each stripping away more volatile components:
Includes: Everything — all goods and services consumed by households.
Volatility: ⚡⚡⚡ Highest (driven by energy and fresh food)
Use case: Broad inflation measure, but noisy
Excludes: Fresh food (vegetables, fish, etc.)
Volatility: ⚡⚡ Moderate
Use case: Used by JGBi — removes weather-driven price shocks
📊 This is the official reference for JGBi indexation
Excludes: Fresh food and energy (gasoline, utilities)
Volatility: ⚡ Lowest
Use case: BOJ's preferred measure of "underlying inflation"
Why Core CPI for JGBi? The MOF chose Core CPI (ex-Fresh Food) as the reference index because it balances stability (removing volatile fresh food) with real-world relevance (keeping energy costs that affect household budgets). This prevents bonds from being whipsawed by temporary shocks like a bad typhoon destroying lettuce crops.
📚 Official Data Sources:
• Statistics Bureau of Japan: Monthly CPI Results
• MOF JGBi Reference Index: Indexation Coefficients
• Bank of Japan: Price Indexes
JGBi: A Direct Bet on Inflation
Japanese Government Inflation-Indexed Bonds (JGBi), known as bukka rendō-sai (物価連動債), are a special type of JGB that provides direct protection against inflation.
Unlike a normal JGB, which pays a fixed coupon on a fixed principal, a JGBi's principal value is adjusted up or down based on the movements of Japan's Consumer Price Index (CPI).
This structure ensures that the investor's return is based on a "real" (inflation-adjusted) yield, not a "nominal" one.
JGBi Structure & Mechanics
📅 Historical Context: JGBi were first introduced in March 2004 but saw limited issuance due to persistent deflation. Issuance was even suspended from 2009-2013 and resumed under Abenomics with the critical addition of a deflation floor at maturity. (MOF: 10-Year Inflation-Indexed Bonds)
1. The Inflation-Adjusted Principal
This is the core concept. The bond has a Reference Principal (the face value at issuance, e.g., ¥100). The Inflation-Adjusted Principal (on which coupon payments are based) is calculated by multiplying this face value by an Indexation Ratio.
$$\text{Adjusted Principal} = \text{Reference Principal} \times \text{Indexation Ratio}$$
Example: If you hold a ¥100M face value JGBi and the Indexation Ratio is 1.15 (15% cumulative inflation since issuance), your Adjusted Principal is ¥115M.
2. The Indexation Ratio
The Indexation Ratio measures the cumulative inflation since the bond was issued.
$$\text{Indexation Ratio} = \frac{\text{Current Reference CPI}}{\text{Base Reference CPI}}$$
- Base Reference CPI: The CPI level at the time the bond was first issued (locked in at issuance).
- Current Reference CPI: The interpolated CPI level for the current coupon payment date.
💡 Key Detail: The Reference CPI is interpolated between monthly CPI values to calculate daily indexation ratios. For bonds issued after March 31, 2016, the ratio is rounded to the fifth decimal place. (MOF: Reference Index Calculation)
3. The CPI and the 3-Month Lag
The JGBi does not use today's CPI. It uses the Japan National Consumer Price Index (ex-Fresh Food), and it is applied with a 3-month lag.
- Why the lag? It takes time for the Statistics Bureau to collect, verify, and publish the official CPI data. The 3-month lag ensures all payments use finalized, official data rather than preliminary estimates.
- Example: A coupon payment on October 10th would be based on the CPI data from July (3 months prior).
⚠️ Implication: During rapid inflation changes, the 3-month lag means JGBi payments will trail real-time inflation. This creates short-term tracking error but ensures administrative certainty.
4. Coupon and Principal Payments
A. Coupon Payments:
The bond has a fixed real coupon rate (e.g., 0.1%). The actual cash payment is this rate multiplied by the Adjusted Principal.
Key Insight: If inflation is high, the Adjusted Principal rises, and so does the cash coupon payment. Your real return stays constant, but your nominal cash flow grows with inflation.
• Reference Principal: ¥100M
• Real Coupon Rate: 0.1% (semi-annual)
• Current Indexation Ratio: 1.20 (20% cumulative inflation)
Calculation:
Adjusted Principal = ¥100M × 1.20 = ¥120M
Cash Coupon = (0.1% / 2) × ¥120M = ¥60,000
If there had been no inflation (ratio = 1.00), the coupon would be only ¥50,000.
B. Maturity Payment (Deflation Floor):
At maturity, the investor receives the greater of:
- The final Adjusted Principal (if cumulative inflation was positive, i.e., Indexation Ratio ≥ 1.00)
- The original Reference Principal (if there was cumulative deflation, i.e., Indexation Ratio < 1.00)
💡 The Deflation Floor: This protection was added in 2013 to make JGBi attractive during Japan's deflationary period. It guarantees you get at least your face value back at maturity, even if cumulative deflation occurred.
Important: The deflation floor only applies at maturity. During the bond's life, coupon payments can fall below the original amount if deflation occurs (Indexation Ratio < 1.00).
(MOF: Deflation Floor Details)
Real Yield vs. Nominal Yield
This is what makes JGBi so important — they directly reveal the market's real (inflation-adjusted) return expectations.
The total return before accounting for inflation.
$$\text{Real Return} = \text{Nominal Yield} - \text{Inflation}$$
Problem: You don't know future inflation, so you don't know your real return in advance.
Example: A 10-year JGB yielding 1.5% gives you 1.5% nominal, but if inflation is 1.0%, your real return is only 0.5%.
The return on top of inflation — already "stripped out."
$$\text{Real Yield} = \text{Guaranteed Real Return}$$
Benefit: Your purchasing power is protected. If inflation rises, your nominal cash flows rise proportionally.
Example: A JGBi with a 0.5% real yield guarantees 0.5% above inflation, regardless of whether inflation is 0%, 2%, or 5%.
Break-Even Inflation (BEI)
By comparing the yields of a nominal JGB and a JGBi of the same maturity, we can derive one of the market's most-watched metrics: the Break-Even Inflation (BEI) rate.
$$\text{BEI} = \text{Nominal JGB Yield} - \text{JGBi Real Yield}$$
What it means: The BEI is the market's implied forecast for average annual inflation over the life of the bonds.
Worked Example:
- • 10-year Nominal JGB Yield = 1.5%
- • 10-year JGBi Real Yield = 0.5%
- • BEI = 1.5% - 0.5% = 1.0%
Interpretation: The market is pricing in an average inflation rate of 1.0% per year for the next 10 years. This is the "breakeven" point — if actual inflation exceeds 1.0%, the JGBi outperforms; if it's below 1.0%, the nominal JGB outperforms.
Trading the BEI
| Your Inflation View | Trade | Rationale |
|---|---|---|
| Inflation will be HIGHER than BEI (e.g., expect 1.5%, BEI = 1.0%) |
Buy JGBi | Your real yield (0.5%) + higher actual inflation (1.5%) = 2.0% nominal return, beating the JGB's 1.5% |
| Inflation will be LOWER than BEI (e.g., expect 0.5%, BEI = 1.0%) |
Buy Nominal JGB | Your nominal yield (1.5%) - lower actual inflation (0.5%) = 1.0% real return, beating the JGBi's 0.5% |
⚠️ Liquidity Caveat
The JGBi market is very small and illiquid compared to the nominal JGB market:
- Issuance: MOF only issues 10-year JGBi quarterly (Feb, May, Aug, Nov) vs. monthly for nominal 10-year JGBs (MOF: Issuance Calendar)
- Outstanding Amount: JGBi represent less than 1% of total JGB outstanding
- Trading Volume: Thin secondary market with wide bid-ask spreads
Implication: The BEI can sometimes be distorted by supply/demand imbalances and liquidity premiums rather than pure inflation expectations. During stress, the BEI may widen not because inflation expectations rose, but because investors demand extra yield for holding illiquid JGBi.
Despite these limitations, BEI remains the only direct market-based measure of Japanese inflation expectations and is closely monitored by the BOJ and market participants.
Current Outstanding JGBi Bonds
Below are the currently outstanding inflation-indexed bonds. Data is updated periodically from MOF sources.
Last Updated: November 03, 2025 at 01:31 UTC 📦 Sample Data
| Issue | Maturity | Coupon | Base Index | Latest Ratio | Outstanding (¥B) |
|---|---|---|---|---|---|
|
第26回物価連動国債 Issue 26 Inflation-Indexed JGB |
2033-03-10 | 0.1% | 105.2 |
1.15245 (+15.25% cumulative) |
600 |
|
第27回物価連動国債 Issue 27 Inflation-Indexed JGB |
2034-03-10 | 0.1% | 106.8 |
1.12134 (+12.13% cumulative) |
700 |
|
第28回物価連動国債 Issue 28 Inflation-Indexed JGB |
2035-03-10 | 0.1% | 108.1 |
1.09876 (+9.88% cumulative) |
800 |
💡 Reading the Table:
- Base Index: The CPI reference level when the bond was issued
- Latest Ratio: Current indexation coefficient (= Current CPI / Base CPI)
- Cumulative Inflation: Total inflation since issuance, reflected in principal adjustment
📅 Issuance Schedule:
• JGBi are issued quarterly in February, May, August, and November
• Each issuance is a 10-year maturity bond with a deflation floor
References & Further Reading
Primary Sources (Official Government Data)
- Ministry of Finance (MOF) — 10-Year Inflation-Indexed Bonds:
Comprehensive overview of JGBi structure, issuance history, and deflation floor mechanism.
https://www.mof.go.jp/english/policy/jgbs/topics/bond/10year_inflation/index.htm - Ministry of Finance — Reference Index and Indexation Coefficient:
Monthly data on CPI reference indices and indexation coefficients for all outstanding JGBi.
https://www.mof.go.jp/english/policy/jgbs/topics/bond/10year_inflation/coefficient.htm - Ministry of Finance — JGB Issuance Plans & Newsletters:
Quarterly issuance announcements and market updates.
https://www.mof.go.jp/english/policy/jgbs/publication/newsletter/index.htm - Statistics Bureau of Japan — Consumer Price Index:
Official monthly CPI data (headline, core, and core-core) used for JGBi indexation.
https://www.stat.go.jp/english/data/cpi/1581-z.html - Bank of Japan — Price Indexes:
BOJ's compilation of CPI data and inflation analysis.
https://www.boj.or.jp/en/statistics/pi/index.htm/
Key Concepts Covered
- CPI Measures: Headline CPI, Core CPI (ex-Fresh Food), Core-Core CPI (ex-Food & Energy)
- Indexation Mechanics: Reference CPI, Indexation Ratio, 3-month lag, interpolation methodology
- Deflation Floor: Principal protection at maturity (bonds issued 2013+)
- Break-Even Inflation (BEI): Market-implied inflation expectations from JGB/JGBi yield spreads
- Real vs. Nominal Yields: Understanding inflation-adjusted returns
Historical Context
- 2004: First JGBi issuance (10-year bonds)
- 2009-2013: Issuance suspended due to persistent deflation
- 2013: Issuance resumed under Abenomics with deflation floor protection
- 2025: Quarterly issuance continues (Feb, May, Aug, Nov)