Turning a negative into a positive

Francois Maury of Natixis examines how the Japanese market has fared and what it means for borrowing and lending. Drew Nicol reports

How has the Japanese market developed in the past 12 months?

The decision of the Bank of Japan (BOJ) on to push into negative interest rates on 29 January 2016 had a lasting impact on the market.

Local players frequently had difficulty adapting to the new rate environment, both from a systems and legal point of view. It therefore created a dislocation between onshore and offshore markets for JPY assets.

A consequence for the stock lending market was the reluctance of some non-Japanese lenders to accept JPY cash collateral, as the fear of a further push by BOJ into negative interest rate territory added to the negative impact on balance sheet of securities versus cash transactions. On the other hand, Japanese counterparts generally did not change their views on the acceptance of cash collateral. Diverging views most likely affected volumes negatively.

As a result, demand for Japanese names was somewhat lacklustre, with the exception of non-March or September names, which were strongly sought after throughout the year.

And how has all this affected your business?

In 2016, we witnessed a generalisation of total return swaps with funding purposes on JPY underlying. Those instruments now widely traded in the interbank market, which, on the one hand, better address the need for banks to optimise their balance sheets, as the swap buyer needs to sell the equity hedge.

On the other hand, they allow market participants to take exposure on the USD/EUR versus JPY crosses under the form of USD or EUR swaps on Japanese equity.

At the same time, we witnessed a general compression of spreads during the period between January to November 2016, with—to take just an illustration—the price of switches Japanese government bonds versus JPY equities moving significantly down.

That phase ended and reversed last November with the take-off of the ‘reflation-rally’ induced by the US elections and we are now seeing some volume pick-up going into 2017.

Looking ahead, what do you see in Japan’s future in terms of securities lending?

We believe the market could further progress albeit with some volatility episodes. About 15 percent of Japanese companies’ profits come directly from North America-based production and should therefore benefit from a large US stimulus, while being relatively immune to potential new trade barriers. Besides a slightly more inflationary global economic environment—led by the US—can only help the BOJ to better achieve their goal to reboot consumers and companies’ spending.
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