An Overview Of The Japanese Money Market

The money market deals in short term and low risk investments. There is a high degree of interdependence between money markets of major economies. In this article we take a look at the Japanese Money Market. The Japanese economy is a highly developed one. However in overall terms the Money Market has been restricted although very highly regulated.

As would be the case in any rapidly growing economy, demand of funds both short and long term,have been and still are very high. A large portion of this demand is from major financial institutions and banks. The Call Money Market (very short term funds, repayable on demand) is highly developed part of the overall Money Market in Japan. The major part of call funds exchanged are between financial institutions. Interest rates on call money are very low. In some cases call money interest rate is zero.

The major part of Financial transactions based on Call Money go through the Tokyo Market. This is about three-fourths of the total. Osaka and Nagoya represent the remaining one fourth.

The two monetary authorities which have a major role to play in the Money market in Japan are the Ministry of Finance and the Bank of Japan (BOJ). Traditionally both these institutions have exercised control over the interplay of demand and supply forces in the money market. This control has prevented interest rates from becoming excessively high. This trend continued until the 1960s.

The situation is different today. Interest rates in the Japanese Money Market are being increasingly dictated by market forces. The Market is opening up to global inflows of funds. Overseas investors are pumping in money into the Japanese economy. Hedge funds form a significant portion of overseas investments.

The Bank of Japan has taken preemptive action to correct the situation in the Money Market. It had a policy called quantitative easing which was in effect from 2001 to 2006. As per this policy the BOJ printed excess money and pumped it into the economy in a bid to save it from deflation. However many analysts believe that it was quantitative easing and the Zero Interest Rate Policy (ZIRP) that actually contributed to inflation. The BOJ has eased out on the QE policy in a bid to reduce deflation.

It invested a massive sum of Y1500 billion or USD 13 Billion into the market in order to cut rates.

In order to prevent future rise in interest rates, BOJ will have to tighten the Monetary Policy. However as per the actual state of the economy this would send wrong signals to investors, commerce trade and industry. This is one of the biggest quandaries that the Japanese monetary authorities find themselves in today.

The BOJ is in the process of evolving a clear framework for its monetary policy. It has do do that to integrate the Japanese Money Market into the rest of the economy and bring about an optimum blend of growth and stability.