Japan Premium in 2014–2015:

Examining the Structural Fragility of Dollar Funding via FX swaps

Abstract

This paper analyzes the factors behind the extra cost of dollar procurement or “basis” that occurred in dollar/yen swaps from mid-2014 until early 2016. Basis is called Japan premium in the late 1990s and generally discussed in connection with the deterioration of Japanese banks’ credit quality. However, in spite of improved credit quality of the Japanese banks, basis is still exposed to upward pressure. This paper investigates the possibility that the structural vulnerability of the dollar procurement by Japanese investors, such as their demand for the dollar being too large for the dollar supply capacity of the Western banks and for the market scale.