BOJ: Trends in Japan’s short-term money market | by Norbert Gehrke | Tokyo FinTech | Oct. 2024

The Financial Markets Department of the Bank of Japan has been conducting the “Tokyo Money Market Survey” since 2008 to track trading trends in the Japanese short-term money market. This survey was originally conducted every two years. In order to be able to follow market trends more closely, it has been carried out annually since 2013. The 15th survey took place in August this year (base point of the survey was the end of July this year). .

As with previous surveys, this survey is aimed at parties involved in the bank’s operations and key participants in the short-term money market. A total of 386 parties were surveyed (a response rate of 100 percent).

The Financial Markets Department of the Bank of Japan will effectively use the results of this survey to grasp trends in the short-term money market, and will strive to grasp the state of financial markets and structural changes from a comprehensive and multi-faceted perspective through the “Bond Market Survey” and other surveys. In addition, the Bank will continue to conduct dialogue with market participants, taking advantage of opportunities such as the “Market Operations View Exchange Meeting” and the “Bond Market Participants Meeting”, and actively support the efforts of relevant parties to revitalize Japan’s financial markets, including the short-term money market, and will itself make as many contributions as possible from its position as central bank.

• Overall market activity: The two outstanding stocks of funds raised and invested in the money market increased compared to the previous year.
• Impact of political change: The abolition of the negative interest rate policy led to a decrease in call transactions as financial institutions no longer had to minimize their key interest rate holdings.
• Repo Market Trends: The repo market witnessed significant growth, particularly in General Collateral (GC) repo transactions. This was driven by factors such as increased non-resident demand for Japanese government bonds (JGBs) and a shift from cash to repo transactions by some foreign securities firms.
• Unsecured Calls Market: The outstanding balance in the unsecured calls market decreased compared to the previous year, but remained relatively high over the longer term. This decline was attributed to lower demand from banks seeking to manage their key interest rate balances following the policy change.
• Secured Calls Market: The secured calling market saw a slight increase in outstanding balance. However, trading activity remained low due to tight supply and demand conditions for JGBs used as collateral and a shift towards GC repo transactions by some banks.
• Market functionality: The functionality of the money market was generally assessed as “high” by market participants. However, they pointed to some challenges, such as the volatility of interest rates for JGB repo transactions, which is influenced by the warehouse financing activities of securities firms.

Detailed observations

• GC repo market: Both the borrowing (for bond investments) and lending (for bond financing) sides saw increased activity in the GC repo market. The decisive factor for this was that the banks increased their borrowing because they no longer had to reduce their key interest balances. On the credit side, securities firms and trust banks increased their activities, driven by factors such as arbitrage opportunities and securing Japanese government bonds as collateral.
• SC Repo Market: There has been an increase in transactions on both sides of the Special Collateral (SC) repo market, particularly between securities firms and foreign securities firms. This reflected growing demand for Japanese government bonds from non-residents engaging in short selling, arbitrage and swap transactions.
• Unsecured Calls Market Dynamics: A detailed analysis of the unsecured calls market shows different trends in overnight and term transactions. The overnight market saw lower bank activity following the policy change, but retained its role as an important venue for trust banks to manage their short-term funds. The futures market recorded a decline in transactions within a month, reflecting the disappearance of arbitrage opportunities associated with the tiered reserve system. Transactions lasting more than a month remained stable, reflecting investment firms’ liquidity coverage ratio requirements.
• Role of financial institutions that do not accept deposits: Non-deposit-taking financial institutions, such as trust banks and life insurance companies, play an important role in the unsecured call market, particularly on the lending side. Their holding is expected to remain stable as they strive to manage short-term funds and optimize returns.

The Japanese money market is in a phase of adjustment after abandoning the negative interest rate policy. While some segments, such as the unsecured calls market, are experiencing a decline in activity, other areas, such as the repo market, are experiencing growth.

The survey highlights the evolving dynamics of the market and highlights the importance of monitoring factors such as:

• Future monetary policy decisions of the Bank of Japan
• Demand for JGBs from domestic and international investors
• Trading strategies and risk appetite of market participants

The Bank of Japan will continue to monitor these trends and work with market participants to support the stable functioning of the money market.