Hike bets are rousing Japan’s rates market

TOKYO – Trade in short-term Japanese interest rate swaps is breaking records and newly-launched futures turnover is surging, as speculators and investors’ hedging revive a once-sleepy market.

BY THE NUMBERS

The notional value of yen contracts for two years or below in the swaps market has hit 865 trillion yen (USD 5.4 trillion) for the year so far, already exceeding last year’s record of 525 trillion, according to the Japan Securities Clearing Corporation.

Three-month TONA overnight average rate futures launched in May last year on the Osaka exchange and annual turnover totaled 3.4 trillion yen.

Over the five months to the end of May 3.3 trillion yen worth of contracts has traded, according to Japan Exchange Group. Open interest in May was a record of more than 45,000 contracts.

WHY IT’S IMPORTANT

The rising volumes show life and liquidity returning to a market that was fallow for years while Japanese rates remained below zero and barely moved.

CONTEXT

Japan ended eight years of negative interest rates in March in a historic policy shift and markets see rates volatility ahead.

Swaps imply another 20 basis points of hikes in Japan’s short-term interest rate this year. Above-target inflation and a weak yen that is putting upward pressure on import prices are driving speculation of even more hikes and demand for hedging interest rate risk that was largely absent in years past.

“If the BOJ’s policy rates stay in a definitely positive territory, there will be more needs for rate hedging,” said Tomohiro Mikajiri, head of yen and non-yen fixed income trading in Japan for Barclays.

(USD 1 = 161.3600 yen)

(Editing by Tom Westbrook and David Holmes)