Internalization, corporate caution shape Japan's FX market trends
The Bank of Japan's review of the 2025 BIS Triennial Survey highlights unique structural characteristics and factors driving changes in Japan's foreign exchange market. The analysis compares Japan's market dynamics with those of other Asian FX markets.
Global surge, Japan's modest rise
The 2025 BIS Triennial Survey reveals a significant 28.5 percent increase in global foreign exchange turnover from 2022, setting a new record high.
This global surge was largely driven by stronger expectations of dollar depreciation and increased market volatility, which saw the USD/JPY exchange rate fall from the upper 149-yen to the lower 143-yen level in April 2025.
In contrast, Japan's average daily FX turnover recorded a more modest increase of 1.8 percent from 2022, reaching $440.2 billion, its highest level since the survey began.
While global growth was broad-based across currency pairs and instruments, Japan's increase was primarily driven by EUR/USD transactions and FX swaps, with USD/JPY and spot transactions actually decreasing.
Interbank participants contributed most to the rise in Japan's turnover.
Domestic factors at play
Japan's modest FX market growth, contrasting with global expansion, is attributed to two distinct domestic factors.
A primary driver is the rising internalization ratio among interbank (IB) participants, who increasingly offset client orders internally.
This reduces the need for cover deals in the broader IB market, particularly in spot trading, a trend observed across both foreign and Japanese financial institutions.
Concurrently, corporate participants have curtailed their trading activity.
This is largely due to a growing adoption of natural hedging, offsetting foreign currency receipts and payments internally.
A shrinking trade deficit since 2022 and a cautious corporate stance amid USD/JPY volatility further contributed to fewer spot and hedging transactions by non-financial customers.
Japan's unique FX path
The Bank of Japan's analysis reveals a distinct trajectory for Japan's FX market, diverging from the global surge in turnover due to structural factors like increased internalization and cautious corporate behavior.
This suggests a more self-contained domestic market, potentially insulating it from certain global volatilities but also limiting its external dynamism.
Understanding these unique domestic drivers is crucial for assessing the effectiveness of monetary policy transmission and the broader financial stability implications for Japan.