Lack of liquidity in Japanese Government Bond market driving interest in TONA-OIS data

23 Jun 2022

The Fed has once again tightened monetary policy and raised the target range for the federal funds rate to a range of 1.5% to 1.75%. This is the biggest increase since 1994. They signalled that they will keep hiking aggressively this year, resorting to drastic measures to restrain inflation.

This monetary policy response to inflation is not limited to the US. In the UK, the Bank of England has also introduced a succession of interest rate rises. The UK rate now stands at 1.25%. The European Central Bank (ECB) announced Wednesday that it plans to create a new tool to tackle the risk of euro zone fragmentation, in a move designed to assuage fears of a fresh debt crisis. Many other global central banks are following a similar path, however, The Bank of Japan continues to maintain a low rate environment in order to stimulate economic growth.

This naturally has put pressure on the Japanese Yen (JPY) and Japanese government bond yields (though 10 year JGBs remain around 0.25%). The Bank of Japan (BoJ) is an outlier in global central bank monetary policy. Investors, in search of yield, are now looking to the TONA-OIS market because it is a more efficient method of gauging the cost of borrowing in the JPY unsecured overnight money market.

Illiquid bond market in Japan

With the Japanese economy still weak and inflation modest compared with other G-10 economies, the Bank of Japan has tested its resolve to keep monetary policy ultra-loose even as the U.S. Federal Reserve raises rates to stem soaring inflation. This has put pressure on Japanese government bond yields.

This increasing pressure is also mirrored by the USD/JPY FX rate where historically there has been a positive correlation with interest rates - US rate rises often causes the USD to strengthen against JPY.

The Bank of Japan’s pledge to control borrowing costs and to stimulate the economy has forced them to implement a substantial bond buying program. They have offered to buy unlimited amounts of the 10-year Japanese bonds from the market.

As movements in bond markets typically convey useful information about investors’ expectations for growth and inflation, this bond buying program has led to a lack of transparency and an illiquid bond market in Japan.

TONA-OIS Market growing in popularity

In search of liquidity, transparency and yield, many players are now looking at the TONA-OIS market.

TONA-OIS has seen a significant increase in trading with weekly trade count growing from 687 to 848, representing a 23% increase, between the week ending 7 Jan 2022 and the week ending 13 May 2022. Notional value also rose during the same period from USD 42.2bn to USD56.8bn, representing a 35% increase.[1] 

[1] ISDA SwapsInfo provided in conjunction with Clarus (20 May 2022)

Trading peaked in the week ending 1 April where weekly trade count reached 1,115 and weekly notional value was USD 72.1bn.

TONA-OIS trade count

 TONA-OIS notional value


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Tradition is the market leader in the Japanese FX and JPY-denominated OTC Interest Rate Derivatives We have operated in Japan since 1985 and have managed the market-leading OTC voice-broking business in derivatives for more than 20 years. 

The TONA-OIS market is very liquid and mostly cleared by the JSCC. TraditionDATA provides pricing with tenors ranging from ON (overnight) to 40 years giving customers the window needed to view the Japanese market. 

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