Compounded rate out of favour, finds Japan survey

Users prefer forward-looking term rate to replace yen Libor, but dealers bemoan “lack of understanding”

A majority of market participants in Japan want to use forward-looking term rates instead of compounded risk-free rates as a reference for new loans and floating rate notes, in a possible departure from standards emerging in other countries’ cash markets, a recent survey shows.

The preference for forward-looking rates, two dealers say, is due to a lack of familiarity with Japan’s designated risk-free rate, Tonar, coupled with an ignorance of the challenges in developing a robust forward-looking