Connectedness and spillovers between Japanese money market instruments

This paper explores the transmission mechanism among Japanese money market instruments of different maturities and risk characteristics from 2007 to 2020. We document that high interconnectedness coincides with financial market crises, stress and elevated uncertainty. Furthermore, the transmission of shocks across maturities and risk characteristics is not consistent with the logic of the monetary transmission mechanism. The policy implications are twofold. First, referring to financial regulatorsʼ paradigm shift from estimationbased （e.g. LIBOR） to alternative rates （TONA）, there might not be a ʻone fits it allʼ model for which risk-free rate is a better alternative. Second, the effectiveness of monetary policy varies across currencies and remains vulnerable to domestic and international developments. If, or when, the Bank of Japan abandons its near-zero interest rate policy, close attention needs to be paid to the behaviour of the first stage of the monetary transmission mechanism.