Arbitrage Activities between Offshore and Domestic Yen Money Markets since the End of the Quantitative Easing Policy

Transactions in the yen money markets have become active since the end of the quantitative easing policy (QEP) in March 2006. In particular, transactions by foreign financial institutions have been increasing in the offshore markets including the FX swap and euroyen deposit markets, as well as the domestic money markets. This Review surveys the spreads and hence the arbitrage relationship between those offshore markets and the domestic money markets. In the short-term money markets, the spreads widened in some phases right after the end of the QEP, but the rates have gradually converged due to increasingly active arbitrage activities among the FX swap, euroyen deposit, and FB/TB markets. In the overnight money markets, although arbitrage activities are conducted between the offshore markets and the uncollateralized call market, particularly when the T/N rates in the offshore FX swap and euroyen deposit markets rise, the arbitrage relationship still has room for improvement. Possible reasons for this are: 1) not a few foreign financial institutions have to rely on T/N funding in the FX swap and euroyen deposit markets as a final funding tool and 2) domestic financial institutions have internal restrictions in conducting arbitrage activities between the offshore and domestic money markets.