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Forex Flash: Analyzing Japanese liquidity – UBS

FXstreet.com (Barcelona) - Leaving central banks out of the picture, we find that liquidity preference in JPY by other categories may be more nuanced. For example, compares central bank JPY deposits in the UK versus that of non-resident banks and others (households or corporates). Similar to central bank trends, there was a sharp rise in JPY-denominated liquidity in 2008 and 2009, but there wasn't a corresponding rise in 2011 or 2012.

However, this picture is misleading. “Foreign corporate (financial and non-financial) penetration in Japan has long been very weak, so we doubt there is much need for such entities to hold large amounts of JPY for liquidity purposes in the first place. 2007-2009 were periods of extreme stress and the unwinding of carry trades (held by Japanese and non-Japanese residents) played a role in the rise in JPY liquidity preference. In the post-crisis environment, however, once JPY liabilities were repaid, the remaining deposits are mostly likely attributable to Japanese entities only.” notes Research Analyst Gareth Berry at UBS.

As global yields were generally weak, there was no interest in reducing such holdings, but there was no need to increase them either, any drop in euro-liquidity preference was probably redirected into the Swiss franc, sterling and the US dollar. This is also consistent with the original notion of 'liquidity saturation' amongst Japanese banks and household. Again, on the margin, it means that global central banks were the key players in maintaining excess yen preference.

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