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Surging Government Bond Trading Volume Drives Growth in Japanese Fixed Income
( Greenwich Associates )
(December 5, 2006)

Tuesday, December 5, 2006 Greenwich, CT USA -Solidifying a trend that began last year, Japanese domestic institutional fixed-income investors significantly boosted their trading in 2006, logging especially large gains in Japanese government bonds. Meanwhile, volume in interest-rate derivatives more than doubled, underscored by Japanese investors' growing interest in the more complex end of that market.

After ratcheting up 22% from 2004 to 2005, total trading volume in domestic cash bonds grew 27% - to ¾242 trillion - from 2005 to 2006. Most of the increase came in JGBs, which now account for a full 85% of the total domestic volume, up from 81% a year ago; volume in mortgage-backed securities, though still a tiny portion of the market, also jumped significantly in 2006 to ¾4.6 trillion. Volume in other domestic sectors was essentially flat. In the non-yen bond sector, volume was up about 10% year-on-year.

These comments are based on the results of Greenwich Associates' 2006 Japanese Fixed-Income Investors Study. A new Greenwich Report presents the results of the research, including an analysis of trading volume growth in a variety of cash bond and derivatives products, a detailed look at why electronic fixed-income trading has failed to catch on in Japan, and an examination of fixed-income staffing levels among Japanese institutions.

Japanese Investors: Active Trading, New Interest in Derivatives
While Greenwich Associates research reveals a large volume increase in domestic trading volume over the 12-month period covered in the study, domestic fixed-income assets under management were essentially flat. In non-yen bonds both trading volume and assets under management increased. "Japanese institutions are trading more actively and turning over their portfolios at a faster rate. One could conclude that some of this activity entails switching assets of domestic bonds into international fixed income," says Greenwich consultant Tim Sangston.

Total trading volume in interest-rate derivatives more than double on a matched sample basis in 2006 to ¾16.2 trillion. While Japanese trading volume in customized interest-rate derivatives remains relatively modest, it is interesting to note that much of the growth in interest-rate derivatives activity last year came in the more complicated end of the market. "Traditionally, interest-rate derivatives trading volume has been driven by interest-rate swaps, but now it's shifting a bit more towards growth in structured notes and interest-rate options, which are the more interesting products in this space," says Greenwich Associates consultant Taeko Sumiyoshi.

Interest in the more complex products may have come at a price. As Greenwich Associates consultant Tomio Sumiyoshi notes: "Several important observers have begun to wonder if some Japanese banks are developing an appetite for risk without fully understanding the nature of certain complex derivatives."

On the other side of the derivatives aisle, Japanese investors generally are very interested in credit derivatives, but that market continues to be plagued by lack of product, tight spreads and illiquidity. The mismatch between demand and supply is surprising, as so many dealers have told Greenwich Associates that they are attempting, or at least are willing, to grow their credit derivatives business globally, including in Japan. "Investors are generally very interested in credit derivatives, but the big issue is they can't find the products available in the market. Plus, if the products are available, the spread is too tight, and liquidity is a problem as well," says Greenwich consultant Dev Clifford.

E-Trading Hampered by Lack of Liquidity, Trust and Personal Contact
Electronic trading continues to limp along in Japan, where only 13% of the domestic investors surveyed said they used e-trading, compared with 52% in the United States. What is more, only 6% of Japanese investors said they were considering using electronic trading systems. E-trading has made only marginally more headway among Japanese investors in international bonds, where 9% of those surveyed in 2006 said they traded electronically, up from a paltry 4% a year ago.

Why this decided lack of interest in a trading strategy that has become so vital to Western markets? For starters, the electronic trading market in Japan, to date, has been comprised mainly of single-dealer platforms, which have not worked well in the United States and Europe. Some of the biggest multi-dealer platforms in the West, such as TradeWeb and Market Axess, have yet to launch in Japan although TradeWeb has plans to open in Japan pending regulatory approval by the FSA. Another reason: In Japan the relationship with the salesperson is especially valued.

For more information contact:
Joan Weber
+1 (203) 625 4354

Greenwich Associates is the leading international research-based consulting firm in institutional financial services. Greenwich's studies provide benefits to the buyers and sellers of financial services in the form of benchmark information on best practices and market intelligence on overall trends. Based in Greenwich, Connecticut, with additional offices in London, Toronto, and Tokyo, the firm offers over 100 research-based consulting programs to more than 250 global financial-services companies. Please contact us for further information or to arrange an interview with one of our consultants. You can visit our website,, for more information.



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