Global Market: Tokyo Financial Exchange unveils futures to hedge BOJ rate volatility

The Tokyo Financial Exchange will launch a new futures contract tied to the Bank of Japan’s overnight call rate this month, seeking to give traders a tool to hedge growing interest-rate volatility as the central bank moves into a more active phase of policy tightening, as per a report by Reuters.

According to Reuters, the new contract lets market participants position for interest-rate changes between BOJ policy meetings, as expectations for the timing and pace of further rate hikes become increasingly important for Japan’s financial markets.

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The exchange’s existing three-month Tokyo Overnight Average Rate (TONA) futures have not fully met demand from traders looking to hedge shifts in rate expectations around individual BOJ meetings. Trading activity in the contract has also weakened despite growing expectations that the central bank will continue raising rates, Reuters reported.

The BOJ last month raised its key policy rate for the second time this year to 1.25%, its highest level in 31 years. Markets widely expect another increase by December, marking a considerably faster pace of tightening than the roughly six-month intervals between rate increases seen previously.

The report stated that trading volume in three-month TONA futures fell nearly 50% in September from a year earlier, according to the Tokyo Financial Exchange.

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The three-month TONA futures contract was introduced in 2023 at both the Tokyo Financial Exchange and Osaka Exchange, a unit of Japan Exchange Group. The launches came a year before the BOJ ended its negative interest-rate policy.

The futures exchanges compete with Japan’s much larger over-the-counter interest-rate swap market, where traders can customize contracts according to their preferred maturities and other requirements.

Demand for overnight index swaps, or OIS, has been increasing as investors seek to manage exposure to Japan’s evolving rate outlook. According to the Japan Securities Clearing Corp, the notional value of yen-denominated OIS contracts covering maturities of up to and beyond 30 years reached a record high last month, as per the report.

Investors closely watch swap rates covering the period between BOJ policy meetings because they indicate market expectations for the likelihood and timing of a rate increase.

The launch of the new futures contract comes as the BOJ’s shift away from its long-standing ultra-loose monetary policy creates greater demand for instruments that can help investors manage short-term changes in interest-rate expectations.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)
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