Yen Volatility Reflected in Japanese Turnover Report

The pace of growth in FX turnover in Japan outperformed other centres according to the latest semi-annual FX turnover surveys, largely thanks to the increased volatility in the yen as interest rate differentials saw it fall to multi-year lows in 2022, and the authorities’ intervention in the FX markets for the first time in decades.

Although there has been a delay in releasing the latest data – the other regional committees released in coordinated fashion last week – the news is good for the local market, although it should be noted that there were unique drivers of the latest survey. Overall turnover hit $500.1 billion per day, the first time it has broken the half a trillion threshold since the data was first published in April 2005, and 4.5% higher than the previous peak set in April 2022.

The data accurately reflects the drivers of market activity in that the lack of action by the Bank of Japan in the monetary policy arena saw subdued FX swaps activity, while that same inaction also helped create growing interest rate differentials, which exacerbated interest in the spot and options markets.

Spot average daily turnover (ADV) was $180.9 billion, easily the highest yet recorded in the surveys – the previous also being in April 2022 at $164.3 billion, and up an impressive 33.5% year-on-year. FX options activity also rose to a new peak at $15 billion per day, up $2.2 billion on the previous high in April 2022 and almost double the $8.1 billion ADV of October 2021.

It should be noted that uniquely for the semi-annual surveys, October saw significant Bank of Japan intervention in the spot market, which would have boosted activity more generally, although it is notable that the biggest surge in trading by currency was in sterling, which rose to $223.7 billion per day in spot, from $128.8 billion the previous October.

The unlikelihood of monetary policy changes in Japan saw both outright forwards and FX swaps activity remain steady, the former rose slightly to $53.7 billion per day from $52.4 billion, while the latter saw ADV of $243.4 billion, down fractionally from $245.1 billion in October 2021.

Although the Tokyo survey does not break it out by product, overall e-trading was higher in October, but it did not significantly outstrip other methods of execution. Overall $214.3 billion of financial institution volume was executed via electronic channels, up 14.4% year-on-year, while volume through other channels rose by 12.4%. Within this, $179.2 billion was e-traded with interbank dealers (up from $153.1 billion in October 2021), while 35.1 billion was executed with Other Financial Institutions ($34.4 billion).

Non-financial e-trading volumes were $50.4 billion, up from $47.3 billion in October 2021, while trading through other channels was $24.8 billion, up from $22.2 billion the year before.

The upheaval in the yen, which saw USD/JPY rise above 150 for the first time since mid-1990, only to be hit down below 140 by repeated Bank of Japan intervention – the first time it had officially intervened since 1998 – was also reflected in responses to the qualitative questions put by the Tokyo FXC on market conditions.

Just 48% of respondents considered the bid-offer spread in the local spot market to be “tight”, with 41% suggesting it was “not so tight” and 10% thought spreads “wide”. In the October 2021 survey, before the yen weakness really started gathering a head of steam, 93% thought spreads were tight, with the remaining 7% citing them as “not so tight”. No-one in October 2021 thought spreads were wide.

Similarly, just 55% of respondents thought it was “easy” to conduct cover deals in the local spot market, while 7% thought it “hard”. In the October 2021 survey 97% thought it easy and the remaining 3% thought it “not easy in certain hours”. In the October 2021 survey 100% of respondents thought the local spot market was functioning at a high level, in the latest survey, this has fallen 79%, with 17% saying it was “not so high” and 3% saying it was functioning at a low level.

The report offers an interesting insight into conditions in the FX market during a period of generational upheaval. Although there are inevitable views that conditions deteriorated, the fact that turnover did increase, often at more than double the rated of other centres, suggests that the FX market in Japan coped with the sustained volatility and market shocks. Looking ahead, it will be interesting what the April 2023 data shows, assuming, of course, conditions have settled down.