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Friday, February 19, 2021
Have monetary easing and policy coordination impacted Tokyo market structure and interdependency?
Takahiro Sekido, Tomoki Hiramatsu

In 2020, the six central banks collaborated on monetary policy to supply USD to prevent the financial crisis on the COVID-19 pandemic. The central banks bolstered monetary easing as governments expanded fiscal spending. Thereafter, JPY basis reversed course and started to stabilize again at the end of the year. In recent years, JPY basis has tightened in response to changes in the US-European yield gap, then widened in response to strong foreign currency asset funding demands by Japanese investors. Once USD funding stabilized amid the pandemic, Japanese investors built up their holdings of US agency bonds and developed country sovereign bonds after redeeming US Treasuries. While they remained exposed to US corporate bonds, Japanese investors have been cutting their positions in other developed economy non-sovereign bonds. Japanese investors appear to have decided to maintain their US Treasury positions and shift to US agency bonds and US corporate bonds as well as other developed country sovereign bonds after redeeming US Treasuries given stable USDJPY basis, because of changes in developed country bond yield curves on USD and JPY denominated basis. Japanese investors and global financial markets may have become more interdependent during the coronavirus pandemic. This appears to have made global policy coordination and policymaker dialog with market participants even more important going forward.

Takahiro Sekido, Chief Japan Strategist at MUFG said "We have developed a G10 JPY cross‐asset matrix covering developed country bond cross‐currency asset swaps in order to update and assess the attributes of the Balance of Payments, Securities flows, and Tokyo market repo trading data of the BoJ, the MoF and the JSDA, as well as US Treasury International Capital data. Our intent is to give our observation and assessment of the current conditions of the international financial markets. This paper serves as a background research piece for our upcoming JPY G10 Cross‐Currency Matrix. "

Since 2016, central banks around the world have increasingly been working in tandem to bolster monetary easing, as the BoJ has been implementing quantitative monetary easing. While not the intention of central bank monetary easing, ultimately their policies may have increased the interdependency of financial markets around the world. Financial and fiscal authorities have looked to the lessons of past financial crises in their decisive policy responses, and this has forestalled another financial crisis for global financial markets. USD fund supplying operations coordinated among key central banks have helped to stabilize the JPY basis market, and Japanese investors have continued to fund overseas assets. Because of this, a selloff of cross-border assets was averted, and international financial risk contagion was contained. We feel that the importance of global policy coordination as well as the necessity of dialog about market structure among not only policymakers but also market participants have grown during the coronavirus crisis. If the central banks had not coordinated on policy, then (i) Japanese investors may have further cut their US bond positions; and (ii) risk contagion may have led to positions being unwound with other developed country bonds, which were an alternative investment destination as US bond portfolios were rebalanced. During the 2020 coronavirus crisis, (iii) JPY basis premium may have shaped global investor behavior, along with developed country credit spreads. Global financial markets have grown increasingly interdependent during the coronavirus pandemic, and the Tokyo market's microstructure and transmission mechanism, especially with JPY basis, has changed as policy coordination among key central banks has grown more important.

Download the full-text report. Authors plan to submit this report to a journal for publication following peer reviews and co-study with academicians. Any errors in this report are under responsibility of the authors.

MUFG Bank
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