The Japan premium and the floating-rate yen euromarket: Evidence and implications

This study investigates the nature of the relationship between the daily offer rates for three-month Euroyen quoted in two markets: Tokyo (TIBOR) and London (LIBOR). We investigate the dynamics of the two series, and the spread between the two series, before and after February 1995. This later period coincides with the sudden deterioration in the credit quality of Japanese rate-setting banks and the introduction of the 'Japan premium' on international borrowings by Japanese issuers following the failure of Hyogo Bank. We conclude that during this period Asia-Pacific borrowers were advised to set floating-rate borrowing agreements to the LIBOR benchmark, even though this added to difficulties in risk management since pricing occurred outside the normal Asian business day. This issue is still relevant with the re-emergence of the 'Japan premium' in international markets.