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The covered interest parity puzzle and the evolution of the Japan Premium

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A disturbance or breakdown of the first stage of the monetary transmission mechanism tends to be synonymous with high and volatile money market risk premia. Such market indicators include violations of the covered interest parity (CIP). This was not only evident during the financial crisis of 2007-08, but already during the Japanese banking crisis in the late 1990s, when it became referred to as the ‘Japan Premium’. Despite extraordinary policy measures by central banks in recent years, however, deviations from the CIP indicate continuing or even elevated stress in the international monetary system. This paper examines a string of distinct, but closely interconnected, assumptions and perceptions regarding CIP arbitrage. By doing so, it not only sheds some fresh light on the recent ‘CIP puzzle’ but also on the era of the Japan Premium during the 1990s and its aftermath.
Original languageEnglish
Pages (from-to)417-424
JournalJournal of Economic Issues
Issue number2
Early online date13 May 2019
Publication statusPublished - May 2019


  • STENFORS_2019_cright_JEI_The Covered Interest Parity Puzzle and the Evolution of the Japan Premium

    Rights statement: This is an Accepted Manuscript of an article published in Journal of Economic Issues on 13/05/2019, available online:

    Accepted author manuscript (Post-print), 515 KB, PDF document

    Due to publisher’s copyright restrictions, this document is not freely available to download from this website until: 13/11/20

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