Graphs and charts nearly always have a story to tell and those included in this edition of IQ, drawn from the Bank for International Settlements’ triennial turnover survey, are no exception.
Since 2010, average daily turnover in Asia Pacific’s foreign exchange (FX) and interest rate derivatives markets has increased steadily, reaching $1.9 trillion and $685 billion, respectively, in 2022. Yet Japan’s share of those markets has dropped over the same period, falling from 27% to 15% for FX derivatives and from 44% to 7% for interest rate derivatives. It seems surprising that a country with an advanced economy and a sophisticated financial market, which once led the region in FX and interest rate derivatives, should have fallen behind other centers like Hong Kong and Singapore.
Multiple factors may lie behind this trend, but an extended period of unconventional monetary policy has certainly played its part. Between 2016 and 2024, the Bank of Japan (BoJ) maintained negative interest rates and control of the yield curve. Both policies came to an end on March 19 following the BoJ’s latest monetary policy meeting, which could pave the way for more active trading and investment to resume, likely driving an increase in derivatives market turnover.
For market participants, the BoJ policy shift brings both opportunities and challenges. A reversal of the yen’s depreciation and increased demand for Japanese government bonds will create a more normal market environment, with greater need for hedging and risk management. But after such a long period of abnormal market conditions, there is now a scarcity of practitioners with experience of normality.
Meanwhile, several regulatory changes are due to be implemented this year, including the final parts of the Basel III framework and changes to derivatives reporting rules. In an interview with IQ, Shigeru Ariizumi, vice minister for international affairs at Japan’s Financial Services Agency and vice-chair of the International Organization of Securities Commissions, sets out the domestic and global regulatory priorities.
Amid these landmark policy changes and regulatory deadlines, ISDA’s 38th Annual General Meeting takes place in Tokyo on April 16-18, with an agenda that will cover the key issues affecting both Japanese and global derivatives markets.
Documents (1) for New Blossom – IQ March 2024
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