Bank risk premia and Abenomics: the return of the Japan premium in the cross-currency swap market

This paper studies the change of the Japanese banking sector during the last two decades through the lens of money market risk premia. It makes two key contributions. First, it is shown how some important developments have been masked not only by the choice of financial market variables when attempting to assess credit and liquidity risk, but also by the perceptions of what these variables ought to represent. Second, the paper demonstrates why recent policies to revive the Japanese economy to end the deflationary era (labelled as ‘Abenomics’) have triggered the ‘Japan Premium’ in the cross-currency swap markets to reappear – with considerable policy implications.