Arbitrage trading fading in Japan and overnight rates falling

The value of overnight yen loans has fallen to its lowest level in more than six years. Such a decline is seen because of the restriction on profitable arbitrage trades by Japanese lenders. Thus, the reduction of the central bank's stimulus measures for the crisis-hit enterprises has led to a decline in Japan's markets.

According to the CB, the rate fell to about -0.08% on Tuesday, the lowest since April 2016. Earlier in March, the -0.004% was reached when lenders were forced to borrow in order to profit from a pandemic support program for firms.

Naomi Muguruma, chief fixed-income strategist at Mitsubishi UFJ Financial Group in Tokyo, said the decline in Covid's balance sheet operations was a major factor in the drop for the one-day interest rate. The demand for financing fell as arbitrage trading declined.

The Bank of Japan's outstanding pandemic funding transactions peaked at 86.8 trillion yen ($626 billion) in March, but the figure has since fallen another 88%.