Japanese interest rate futures activity declines in March amid flat rates

The Japan Exchange Group (JPX), which runs Osaka Exchange (OSE), reported March trading volumes in three-month Tokyo Overnight Average Rate (TONA) futures down 83% year-on-year to 36,441 contracts. This comes in contrast to January, when the contract reported 67% year-on-year increase in trading volume to 76, 729 contracts.

The Tokyo Financial Exchange’s (TFX) three-month TONA futures volumes slumped last month to 51, 374 contracts in March, a 56% decrease as compared to same time last year. The latest figures come as the BOJ opted to leave rates at around 0.75% over the impact of the Middle East conflict on the economic outlook.

Meanwhile, Singapore Exchange (SGX), which listed its TONA futures in July 2024, traded 36,437 lots in February, a 49% year-on-year decrease.

A research paper published by the JPX Group on March 18, a day before the BOJ convened a meeting, concluded that TONA futures serve as a price-discovery mechanism for BOJ policy expectations, complementing and often leading movements in overnight index swaps (OIS) and Japanese government bond (JGB) markets.

Importantly, the findings highlight that TONA futures play an important role in shaping policy expectations and transmitting information across the Japanese yield curve.

Through three separate case studies, the paper explored how Japan’s cautious monetary normalisation, amid heightened geopolitical uncertainty, has been reflected in the pricing and behaviour of TONA-indexed instruments.

One of the case studies discussed about TONA futures when BOJ increased rate on July 31, 2024.

The paper pointed out that JGBs serve as highly liquid, risk-free securities, meaning safe-haven flows and collateral scarcity can have an immediate influence on yields. TONA-OIS, by contrast, remain largely insulated from such pressures, making them a more precise tool to measure of monetary policy expectations.

“The emergence of 3-Month TONA futures has provided a precise, liquid, and policy-sensitive tool for expressing, hedging, and analysing near-term BOJ rate expectations,” the paper said.

Meanwhile, JPX reported a 35% jump in trading volume to 57 million contracts in March, the second highest record for the exchange.

This was driven by record trading for Nikkei 225 micro futures at 24 million lots, a 103% year-on-year increase. JPX Group in a LikedIn post last week said that Nikkei 225 micro futures have traded over 20 million contracts in a single month for the first time since its initial listing in May 2023, setting a new all-time high.

Nikkei 225 mini options reported trading volume up 35% to 1.3 million lots in March.

JPX Group saw the trading volume of mini-20-year JGB Futures at an all-time high at 121,979 contracts.

In addition, the OSE said on Wednesday that mini 20-year JGB futures has been designated as tradable contract for Taiwanese investors as of March 25, by Taiwan Futures Exchange Corporation (TAIFEX).

JPX also saw gold standard futures trading volume down 6.8% to 532,713 lots, gold mini futures reported trading volume up 57% to 308,127 contracts.

JPX had reported record trading volumes for several derivatives contracts last year, driven by market structure enhancements and launch of new contracts.