Thursday, March 22, 2007

Let It Not Be Said That Things Are Dull At the BOJ

This is a great interview because while it shows that monetary officials in Japan are no less adept at dancing around questions, reading between the lines of the answers reveals the BOJ is in a high state of alert WRT what's going on with its currency. Kudos as well to Mr. Nakaso for pointing at the China was not THE cause for the worldwide swoon in stocks Feb 27th.

TOKYO, March 22 (Reuters) - Following are key remarks made by
Hiroshi Nakaso, director-general of the Bank of Japan's financial
markets department, in an interview with Reuters on Thursday.

Q. How do you view recent developments in Japan's money market over
the past year since the BOJ ended its ultra-easy policy, called
quantitative easing? What are challenges ahead?

"The money market has become very active over the past year.
Short-term derivatives markets, such as trading in overnight index swaps
(OIS), have grown rapidly over the past year ...
"Challenges ahead include enhancing effective collateralised markets
and short-term derivatives markets. We are trying to yield specific
results in our efforts in this area over the next six months ...
"We are keeping a close eye on the OIS market. But the market is
still driven mainly by some foreign financial institutions. If more
traders participate, the market will better reflect the market's view on
interest rates and increase liquidity ...
Q. As more foreign investors join in Japan's money market, rates
could fluctuate more than before. Would that affect the BOJ's money
market operations?

"We are now back in the world of having interest rates. The
overnight call rate has been risen to 0.5 percent from 0.25 percent. The
market function is gradually and steadily recovering ... There will be
flows of funds, and as a result it is natural for interest rates to
fluctuate to some extent. I think that is what we call a process of
rates being determined in the market. "

Q. The benchmark 10-year Japanese government bond yield hit a
13-month low on Thursday, a level seen before the BOJ ended its
quantitative easing policy. How do you view the recent decline in
Japan's long-term interest rates and what are reasons behind it?
"The outlook for prices is stable. In addition, it (the decline) is
also affected by falls in interest rates overseas, especially those in
the United States. Furthermore, market participants do not expect an
interest rate hike any time soon after February's rate rise. So
investors who had been refraining from buying bonds are starting to
invest again, and that has underpinned demand for bonds. Those factors
combined are supporting the JGB market."

Q. How do you view adjustments in global markets since end-February?
"There are still factors to be examined but basically the adjustment
since end-February has been mainly due to increased concerns among
traders about taking excessive risks ...
"If we look back closely, I think markets had already been worried
about a build-up of risk positions. A decline in Chinese stock prices
itself was not the reason behind stock prices falls worldwide, but it
helped trigger such movements.
"Since the end of February, people have become more worried about
subprime housing loans in the United States, and markets are a bit more
cautious about the U.S. economic outlook. But there is no change in
global economic fundamentals, and I think the recent adjustment is only
"In any case, global stock markets, including the U.S. market, have
been sensitive to daily economic indicators and other factors, while the
foreign exchange market has been nervous after a recent unwinding of
some carry trades. So we would like to continue monitoring market
movements carefully."
Q. What is your view on the yen carry trade and its impact on
financial markets?

"Since the end of February, volatility in the foreign exchange
market has increased amid global stock market adjustments, so some hedge
funds unwound their yen selling positions and that was reflected in the
market. But if you look at the long-term trend, Japanese investors,
including individual investors, would be unlikely to change their stance
on investing in foreign currency-denominated assets. In any case, it is
hard to understand the overall picture of yen carry trade, and some
hedge funds could change their positions substantially in a short period
of time, so the BOJ would like to monitor movements closely."

Q. Do you think there is a worry about a sharp unwinding of yen
carry trades?
"So far, we have not seen any sign of such unwinding, but we would
like to keep monitoring movements carefully."

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