Under such circumstances, the so-called “Japan premium” – the extra risk premium charged to Japanese financial institutions reflecting market participants’ heightened concerns over their creditworthiness – increased significantly.
At the same time, Japanese banks entered into swap transactions to obtain much needed foreign currency funding – such transactions are, from the viewpoint of Japanese banks, exchange of yen funds for dollar funds for a certain period. These operations by banks put significant upward pressures on short-term domestic money market rates.