Institutions, reforms, and country risk: Lessons from Japanese government debt in the Meiji era

We investigate the effect of the establishment of modem institutions on the risk premium associated with Japanese government bonds traded in London be tween 1870 and 1914. While most institutional innovations failed to elicit an immediate market response, the adoption of the gold standard did signifi cantly reduce the perceived risk associated with Japanese bonds. In additio n, some geopolitical events, especially the military victory over Russia, i mproved Japan's debt capacity. We conclude that well-understood monetary ru les and military achievements matter more for foreign investors' perception of a country than do modem state institutions, at least in the short run.