Japanese FXI can coexist with the Tokyo Overnight Average Rate (TONA) and the Tokyo Term Risk Free Rate (TORF) by complementing JPY benchmark reform with a reliable and robust credit-sensitive spread to serve as a reference credit spread for Japanese financial institutions to conduct credit pricing and risk management.
This note by Professor’s Tatsuyoshi Okimoto and Sumiko Takaoka is a feasibility study of JPAXI and JPFXI, which are similar benchmark indices, accounting for specific features of the Japanese corporate bond market. More specifically, JPAXI is calculated by a transaction-volume-weighted median of recent credit spreads for both senior and subordinated corporate bonds that are publicly issued in Japan by Japanese bank holding companies and commercial banks. Unlike the calculation of AXI for the US, JPAXI includes subordinated bonds in its computation, given that a substantial portion of traded corporate bonds issued by bank holding companies and commercial banks in Japan are subordinate bonds. JPFXI, on the other hand, expands its coverage to encompass all corporate bonds issued in Japan.
Even though Japan will retain the Japanese Yen TIBOR, the JPAXI based on the methodology proposed by Berndt, Duffie, Zhu (2023) has the following three advantages: 1) it is free from arbitrary judgment by reference banks; 2) it has a wide range of longer maturities; and 3) it is a direct measure of the actual costs of funds for banks. If Japan had a large enough pool of bond market transactions for corporate bonds issued by banks, this index could potentially serve as a benchmark for the Japanese market in accordance with the IOSCO principles. This would offer a reliable point of reference for pricing various financial instruments, including derivatives, loans, and securities across a broad spectrum.
Tatsuyoshi Okimoto, Professor of Economics and Finance at the Faculty of Economics, Keio University, Tokyo, Japan, and co-author of the Japanese AXI and FXI feasibility study said, “JPFXI would be a highly valuable reference rate for the Japanese corporate bond market, as it reflects the actual funding costs more efficiently and accurately based on the transaction data”.
Sumiko Takaoka, Professor in the Faculty of Business Administration at Seikei University, Tokyo, Japan, and co-author of the Japanese AXI and FXI feasibility study commented that, “JPFXI appears to be a reliable benchmark index for Japan, thus becoming a major transaction-based credit spread benchmark for pricing various financial instruments such as derivatives and securities”.
Chief Executive Officer of SOFR Academy, Marcus Burnett, added, “I am very pleased about the publication of the Japanese AXI and FXI feasibility study. A Japanese Yen denominated FXI will be helpful for Japanese financial institutions and can complement the development of new markets referencing near risk free rates such as TONA and TORF. I am very grateful to Professor’s Okimoto and Takaoka.”
About Tatsuyoshi Okimoto
Tatsuyoshi Okimoto is a Professor of Economics and Finance at Faculty of Economics, Keio University, Tokyo, Japan. Professor Okimoto is also a research associate at Research Institute of Economy, Trade and Industry, a principal at Economic Design Inc., and a director for Nippon Finance Association. He received PhD from the University of California, San Diego in 2005. He worked for Australian National University, Hitotsubashi University and Yokohama National University before joining the Keio University in 2022.
About Sumiko Takaoka
Sumiko Takaoka is a Professor at the Faculty of Business Administration, Seikei University, Tokyo, Japan. She received PhD in Economics from Osaka University in 2003. Before joining Seikei University, she held previous academic appointments as a research associate at Tokyo University and as a research fellow in Kyoto University. Professor Takaoka was a Visiting Scholar, Harvard University, Reischauer Institute of Japanese Studies from 2007 to 2009.
Have a question, feedback, or idea about Japanese FXI? Contact us.
SOFR Academy, Inc. provides financial education and market data to empower corporations, financial institutions, governments, and individuals to make better decisions. The Firm’s panel of advisors includes academics from Tsinghua University, Harvard University, the University of California Berkeley, New York University, Oxford University and London Business School, as well as experienced financial services professionals. SOFR Academy is also driving the operationalizing of AXI and FXI as credit spread add-ons for near Risk-Free-Rates for use in lending and derivative markets. SOFR Academy is a member of the Asia Pacific Loan Market Association (APLMA), American Economic Association (AEA), the Loan Syndications and Trading Association (LSTA), the International Swaps and Derivatives Association (ISDA), the Bankers Association for Finance and Trade (BAFT) which is a wholly owned subsidiary of the American Bankers Association (ABA), and the U.S. Chamber of Commerce (USCC). For more information, please visit SOFR.org