Jun 20, 2020 (Japan Today) - Japan, the biggest taker of cheap dollar funding from the U.S. Federal Reserve during the coronavirus pandemic, is weaning itself off that supply as it shies away from emergency swaps and returns to now sedate interbank markets.
When the Federal Reserve announced cheap dollar swap lines for global central banks in March as it tried to stave off a dollar funding crunch wrought by the pandemic, Japan was first out of the blocks.
From April through this week, the Bank of Japan was the biggest user of that cheap funding, taking up as much as $225 billion or more than half of what was on offer, as a banking sector addicted to investing and lending overseas struggled to get the dollars it needed from interbank markets.
That helped Japanese banks and funds to keep investing in higher-yielding U.S. stocks and global bond markets, as they have traditionally done, to beat the near-zero returns on offer at home.
Data this week, however, shows Japanese institutions are not keen to renew their three-month yen-for-dollars swap contracts with the Fed, which they access through the Bank of Japan.
The BOJ's outstanding dollar swaps with the New York Fed stood at $171.4 billion on June 18, which is down from a peak set in late May but still accounts for 61% of the Fed's total outstanding dollar swaps with major central banks.
Analysts expect Japan to steadily reduce its reliance on the Fed swap window, since interbank markets have normalised and banks would rather go there than borrow from what is deemed a central bank emergency window.
