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