New Study Explores Feasibility of AXI, FXI Indices for Japan

The study assessed the feasibility of Japanese versions of the FXI and AXI indices, concluding that they can coexist with TONA and TORF.

A new study has been published to assess the feasibility of Across-the-Curve Credit Spread Indices (“AXI”) and Financial Conditions Credit Spread Indices (“FXI”) in Japan.

Last year, Invesco Indexing LLC and SOFR Academy launched the first AXI and FXI indices, designed to serve as credit spread add-ons for SOFR to form a credit-sensitive interest rate for use in lending and derivatives markets. The indices helped address concerns that bank returns on SOFR-linked loans would decline under economic stress, causing higher costs of funds and a significant asset-liability mismatch.

The authors of the new Japan study – Professor Tatsuyoshi Okimoto of Keio University and Professor Sumiko Takaoka of Seikei University – assessed the feasibility of Japanese versions of the FXI and AXI indices, which accounted for specific features of the Japanese corporate bond market.

JPAXI is calculated by a transaction-volume-weighted median of recent credit spreads for both bonds issued by Japanese banks and bank holding companies, while JPFXI encompasses all corporate bonds issued in Japan.

The study found that a JPFXI index presents a “stable and reliable” benchmark credit spread index for Japan, as it reflects the actual funding costs more efficiently and accurately based on the transaction data.

JPAXI is said to exhibit “unreasonable fluctuations” due to the limited number of trading bonds issued by banks in Japan. However, if there was a larger pool of such bonds, JPAXI could too become a major transaction-based credit spread benchmark for bank lending and risk management, the study says.

Specifically, JPAXI has three advantages: it is free from arbitrary judgment by reference banks; it has a wide range of longer maturities; and it is a direct measure of the actual costs of funds for banks.

The study, published here, describes how credit spreads of traded bonds are calculated, how JPAXI and JPFXI are calculated, the limitations of the two indices, and the potential impact of these indices for the Japanese market.

Commenting on the feasibility study, Marcus Burnett, CEO of SOFR Academy, said a JPY denominated FXI will be “helpful for Japanese financial institutions” and can “complement the development of new markets referencing near risk free rates such as TONA and TORF.”

In Japan, TONA and TORF have been adopted as new risk-free rates, though the reformed JPY TIBOR is expected to be the main alternative benchmark to replace JPY LIBOR, which ceased at the end of December 2021. Euroyen TIBOR is expected to be discontinued.

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