Foreign buyers jolt e-trading in Japan government bonds

Platforms report rise in small-ticket volumes, but bigger trades remain on voice

A row of bankers seated at their desks with telephone handsets pressed to their ears hardly evokes the image of a modern 21^st century fixed-income trading room. Especially one in the financial capital of a country known as an electronic technology pioneer. 

But this is the scene that might confront a person taking a tour of a government bond trading floor at one of Tokyo’s investment banks or securities brokerages today. That’s because Japan’s trillion-yen government bond market has long been a laggard in electronic trading. While e-trading has become the dominant style in other major government bond markets, notably the US, in the Japanese government bond (JGB) dealer-to-client market, voice trading is stubbornly clinging on. 

However, e-trading of JGBs is now, gradually, beginning to catch up, dealers say. The catalyst is the Bank of Japan’s slow shift to monetary policy normalisation and balance sheet unwinding. On March 19, the BoJ formally brought an end to negative short-term interest rates, raising rates from -0.1% to a range from zero to 0.1%. At the same time, the central bank also announced the end of its yield curve control policy, which had kept long-term government debt yields at around 0%.

The long-signalled move has piqued the interest of international investors in the JGB market. Already active participants such as asset managers and pension funds are upping their trade volumes. Meanwhile, higher volatility is luring new entrants such as hedge funds. 

These international investors are executing JGB trades just as they would with US Treasuries, gilts or government bonds in any other major currency – by using multilateral electronic platforms including Tradeweb or Bloomberg. The overall share between voice and electronic trading within the JGB market has begun to shift as a consequence. 

“The share of e-trading is increasing because the activity of international investors in the JGB market is increasing,” says Daiki Hayashi, head of Japan markets sales and marketing at JP Morgan in Tokyo. 

Hayashi estimates that around 60% of dealer-to-client JGB tickets are traded electronically today, compared with around 30% as recently as 2020. The figures are based on data from the Japan Securities Dealers Association as well as the three dealer-to-client JGB trading platforms, Tradeweb, Bloomberg and Yensai.com. 

Growth can also be seen in trade volumes, albeit less dramatic. At the start of 2020, roughly 12% of dealer-to-client trade volume was electronically executed, says Hayashi. It now stands at about 18%, a figure that remains significantly lower than the two-thirds of overall volume traded electronically in the US Treasuries market, according to a 2022 Greenwich Associates report. 

Tatsuo Ichikawa, head of the quant team in the investment division at Japan Post Bank, believes non-Japanese investors are driving the change in the JGB market.

“Looking at the recent JGB trading volume data from JSDA, trading activities of overseas investors has picked up while the trading volume for other investor types has stayed sideways,” he says. “I think the recent pick-up in the JGB e-trading is coming from more trading activities from overseas investors.”

Whether the rise in electronic trading volumes will tempt the major domestic players who trade in large blocks to switch from voice to platforms remains to be seen. Their trades tend to be in longer tenors, and liquidity at the back end of the curve is spottier. Experts believe these big domestic dealers may be reluctant to change their in-person trading style.

Going electric

As the proportion of tickets traded electronically has roughly doubled but overall e-trading volumes have risen by a half, the disparity suggests that new activity on platforms is for smaller-ticket items. Meanwhile, a lower number of exceptionally large ticket trades are still negotiated and traded between dealers, brokers and clients over the telephone. Small size trades are around ¥100 million ($670,000), for example. Large trades can be around ¥10–15 billion.

Dealers and platform owners say that both Japanese and non-Japanese asset managers, mutual funds and pension funds have – for some time already – traded JGBs on electronic platforms. These participants have a choice of three dealer-to-client platforms that operate request-for-quote protocols, Tradeweb, Bloomberg and Yensai.com – while two other platforms, the Japan Bond Trading Co’s BB Super Trade, and Totan Securities’ JBond cater for the interdealer market. 

13.7%

Amount of JGB and T-bills held by non-Japanese institutions, versus 13.1% held by Japanese banks

Executing lots of small-ticket trades on an electronic platform suits many clients because it is more efficient than the more cumbersome voice method, dealers say. 

“Asset managers, pension funds – they do many transactions in smaller clips. So, they prefer using electronic platforms because it’s going to be easier from an operational standpoint,” says a macro trading head at a European bank in Tokyo. “If you do a voice trade you have to book it into the system and that can mean a lot of human work. But with electronic trades, that workflow goes through the system automatically, saving human involvement.”

JP Morgan’s Hayashi says that the bank also sees frequent trading by asset managers on the e-trading platforms. “The number [of trades] gets so large that those types of investors have a big motivation to execute the transaction on an e-platform.”

As the BoJ loosened its grip on the rates market last year, allowing 10-year bond yields to rise to almost a nine-year high, these real money investors have become ever more active. But the JGB market has also begun to attract a new breed of participant – overseas hedge funds. This mirrors a trend seen in other parts of the yen rates market, namely swaps and futures trading. These hedge funds are also making small ticket trades that are executed electronically, say vendors. 

As of September 2023, non-Japanese institutions held 13.7% of JGB and T-bills, exceeding the 13.1% held by Japanese banks, according to data published by the Japan Securities Dealers Association. In the same month, excluding bond dealer trades, non-Japanese institutions accounted for 54.7% of overall JGB trading volume, according to a Risk.net analysis of JSDA data.

“Our JGB customer base has traditionally been various types of real money accounts,” says Taichi Shibuya, head of Japan at Tradeweb. “But since last year, we have started to see lots of hedge funds or fast money accounts, who tend to run macro, relative value or systematic strategies.”

Shibuya explains that the newcomers are aiming to profit from a rise in volatility. In April last year the S&P/JPX JGB Vix index, which measures implied volatility in Japanese government bonds, hit record highs amid speculation of further monetary policy adjustments from the BoJ.

The increase in JGB trading by non-Japanese firms has had a knock-on effect in the repo market, too. Since the BoJ began adjusting its yield curve control policy, Brokertec has seen a “sizeable uptick” in volumes of JGB repo trading from non-Japanese institutions on its dealer-to-client platform, according to Sara Carter, global head of repo at the firm.

“Institutions in London and New York are super interested in the JGB market,” she says. “Allowing these firms to access liquidity in repo via a regulated trading platform in Japanese trading hours is something that we’ve been working on, and we’ve adjusted our opening hours in order to facilitate that trading.”

Back to the old school

On the other hand, a large chunk of domestic participants in the JGB market remain wedded to trading over the telephone – namely the treasuries of Japanese megabanks and life insurance firms. The typical trade by a Japanese lifer or megabank is large in size and long in tenor. Since there is typically much thinner liquidity in such sizes at the long end of the curve, clients like to negotiate pricing with their brokers and dealers over the telephone.

The number and size of these trades is the key reason the share of overall volume traded electronically in the JGB market remains substantially smaller than that of the number of tickets.

“When the large portfolios execute the larger tickets, they want to get to negotiate the price,” says Hayashi. “They want to talk to dealers like us, because the liquidity in the market is smaller. Those types of transactions are still being done by voice.” 

Japan Post Bank’s Ichikawa agrees that there is simply insufficient liquidity available on dealer-to-client platforms in the sizes megabanks and lifers often trade. 

“Trading volume in the JGB e-trading hasn’t picked up relative to other markets mainly due to limited participation from large domestic investors, such as the megabanks and insurers,” he says. “This is because typical trading lot of these investors is too big for the limited liquidity in the e-trading platform.”

Hanging up

Platform vendor Bloomberg is optimistic that e-trading in the JGB market will continue to develop in the coming years. The BoJ’s decision to end its yield curve control and negative interest rate policies is likely to support demand for JGBs from foreign firms that trade on platforms. And as that activity grows, it could begin to outweigh the voice trading activity of megabanks and lifers in terms of the overall trading volume. 

“What’s happening is foreign buyers are now, for the first time in a very long time, starting to pay attention to Japan again,” says Norman Tweeboom, country head of Japan at Bloomberg in Tokyo. “When rates are zero or negative there was no interest, you could find better opportunities elsewhere. But today with yen rates are starting to creep up, from a diversification standpoint and with Japan being the second largest government bond market globally, these macro factors are driving demand for JGBs.”

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Tweeboom adds that increased foreign activity on platforms could prod domestic companies to “keep up with the times” and migrate to e-trading.

Tradeweb hopes that continued enhancements to the platform’s offering in the Japan market will encourage further e-trading adoption amongst Japanese participants. Several upgrades have just been released or are in the pipeline, says Shibuya. One of the latest ones allows clients to negotiate trades in relation to the previous day’s Japan Bond Co’s BB close price. Shibuya says this is already common with Japanese JGB traders on voice channels. 

“If you’re Japanese, usually what you do is you take the price versus yesterday’s BB close price and the dealers will quote plus or minus basis points versus yesterday’s BB close price,” he says. “We expect the usability of our platform will increase, and it will bring more clients from voice and from our competitors to our platform.”

There is consensus, however, that the JGB market is unlikely to fully catch up with US Treasuries any time soon. For participants like the Japanese megabanks and insurance companies, that make large, infrequent trades, the telephone is likely to remain the favoured trading tool – regardless of the direction of BoJ monetary policy. 

Hayashi says: “I think the BoJ monetary policy change won’t impact the behaviour of the large portfolios. They will still want to do voice trading instead of e-trading.”

Editing by Alex Krohn