JCER Financial Stress Index―A Technical Note―

公益社団法人 日本経済研究センター

Japan Center for Economic Research
April 26, 2022

Notice of the revision in the series of underlying data
Senior Economist, Takashi Miyazaki
Background of the revision
With the suspension of LIBOR1 publication at the end of 2021, data on the LIBOR-based "Dollar
Funding Premium (yen/currency basis, 1-year)," one of the underlying indicators used to calculate theJCER Financial Stress Index (hereinafter referred to as the Index), is no longer available. Therefore, it
became necessary to revise the calculation method of the Index.
Specific measures to be taken
After January 2022 when data for the LIBOR-based dollar funding premium is no longer available, therisk-free rate (RFR)-based dollar funding premium, an alternative interest rate measure to LIBOR, will
be used. Specifically, after January 2022, the RFR-based dollar funding premium will be connected byadding the week-to-week "change" in the RFR-based dollar funding premium to the final value of theLIBOR-based dollar funding premium. This newly created series will allow the Index to be calculatedand updated while maintaining as much continuity and consistency in the data as possible.
Results
Figure 1 displays the results of updating the Index through the most recent date (April 22, 2022) using
the above-mentioned method. As can be confirmed in the "Details of the revision" section below on
the next page, the influence of this revision on the historical index values is negligible.
Figure 1. Comparison of Previous Index and New Index
0.8

Index

JCER Financial Stress Index

LTCM crisis

0.7

Global Financial Crisis(Lehman Shock)Temporary
Nationalization ofJapan Long-Term
Credit Bank

0.6
0.5
0.4
0.3
0.2

Corona Crisis

Negative Interest Rates
Brexit Referendum

Greek Crisis

Paribas
Shock

September 11
Terrorist Attacks
Collapse of IT
Bubbles
Iraq WarHighstress

European Debt
CrisisUS Stock
Adjustment

China
Shock

0.1
0.0
98

00

02

04

06

08

10

12

14

16

18

20

Low
stress
22/04 Weekly
22

Note: The red line (previous index) is up to December 24, 2021; the blue line (new index: dollar funding premium extended by adding thechange in RFR-based dollar funding premium) is up to April 22, 2022.
Source: Estimated by Japan Center for Economic Research based on Bloomberg and FactSet
1Acronym for London Interbank Offered Rate. The London Interbank Offered Rate is a typical benchmark rate
at which banks lend and borrow short-term funds with terms of one year or less.
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Released on April 26, 2022

< Details of the revision >(Summary of Dollar Funding Premium)The dollar funding premium is the interest rate range that is added to the dollar interest rate whenborrowing dollars in a foreign exchange swap against the home currency. As an approximation, it isexpressed separately as the forward spread (the percentage deviation of the forward rate from the spotrate) and the interest rate differential between the yen and the dollar (yen-dollar), as shown below.
Dollar Funding Premium＝Spot Rate× 1 + Yen Interest Rate − 1 + Dollar Interest Rate
𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑅𝑎𝑡𝑒

Traditionally, LIBOR has often been used as the data for yen and dollar interest rates in the above
equation to calculate the dollar funding premium (Iijima et al., 2022).
(Risk-Free Rate as an Alternative Indicator)
Regarding indicators for monitoring the funding environment after the suspension of LIBOR
publication, foreign central banks and many international organizations have proposed the use ofrisk-free rates (RFRs). The O/N RFRs, which are internationally regarded as the mainstay ofalternative interest rate indicators to LIBOR (the unsecured call O/N rate (TONA) in Japan and thegovernment bond GC repo O/N rate (SOFR) in the US), are interest rate indicators calculated from
actual transactions in highly liquid markets and are regarded as highly reliable and robust indicator. Inaddition, regardless of whether LIBOR or RFR-based indicators are used, the difference between thetwo is extremely small, at least in normal times (Iijima et al., 2022). Therefore, it seems reasonable touse the dollar funding premium calculated using the RFR as an alternative indicator.2
However, the RFR, which is an alternative interest rate indicator, does not encompass credit andliquidity risk of financial institutions, so it can deviate from the LIBOR-based dollar funding premium
during stress periods. The dollar funding premium we have been used so far (Bloomberg ticker:JYBS1 BGN Curncy) corresponds to the LIBOR-based dollar funding premium.
Figure 2 compares the LIBOR-based dollar funding premium to its alternative measure, theRFR-based dollar funding premium (Bloomberg ticker: JYBSS12M BGN Curncy). The dollar funding
premium using TONA and SOFR as the reference rate relative to LIBOR is an RFR-based dollar
funding premium, which is different from the LIBOR-based dollar funding premium. Therefore,
simply connecting the LIBOR-based dollar funding premium to the RFR-based dollar funding
premium would make it impossible to compare the relatively high or low values over time.3 Thus, theapproach will be to connect the final LIBOR-based dollar funding premium values after January 2022
by adding the week-to-week "change" in the RFR-based dollar funding premium to the final
LIBOR-based dollar funding premium values, thereby ensuring continuity of the data.
2

The dollar funding premium calculated using RFRs are available from Bloomberg, with data available fromMarch, 2021.
3In the process of calculating the Index, each of the underlying data is compared with its own past values andranked (converted to an ordinal statistic), so if the data are simply connected, they cannot be compared because
they are at different levels (the ordinal statistic will not be calculated correctly).
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Japan Center for Economic Research

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Figure 2. Comparison of LIBOR-Based and RFR-Based Dollar Funding Premiums
60(%)
Difference
JYBSS12M: RFR-based dollar funding premium (1 year)
JYBS1: LIBOR-based dollar funding premium (1 year)

5040302010(daily)
021/03 21/04 21/05 21/06 21/07 21/08 21/09 21/10 21/11 21/12 22/01 22/02 22/03 22/04
Notes: The latest value is on April 12, 2022. The LIBOR-based dollar funding premium (1 year) is throughDecember 30, 2021.
Source: Bloomberg(Recalculation Results Using an Alternative Indicator)
Figure 3 (redisplay of Figure 1) compares the Index calculated using as underlying data the indicator
created by extending the dollar funding premium after January 2022 using the method described above(hereinafter referred to as the "New Index") with the previously published index. Past values arelargely unaffected.
Figure 3. Comparison of Previous Index and New Index
0.8Index

JCER Financial Stress Index

LTCM crisis

0.7

Global Financial Crisis(Lehman Shock)Temporary
Nationalization ofJapan Long-Term
Credit Bank

0.6
0.5
0.4
0.3
0.2

Corona Crisis

Negative Interest Rates
Brexit Referendum

Greek Crisis

Paribas
Shock

September 11
Terrorist Attacks
Collapse of IT
Bubbles
Iraq WarHighstressEuropean DebtCrisis

US Stock
Adjustment

ChinaShock0.1
0.0
9800

02040608

101214161820Lowstress
22/04 Weekly
22

Note: The red line (previous index) is up to December 24, 2021; the blue line (new index: dollar funding premium extended by adding thechange in RFR-based dollar funding premium) is up to April 22, 2022.
Source: Estimated by Japan Center for Economic Research based on Bloomberg and FactSet

To check the robustness of the New Index, Figure 4 compares the above new index with a series
calculated by adding the "change in RFR-based dollar funding premium" to the LIBOR-based dollar
funding premium back to March 2021, when RFR-based dollar funding premium data are available.
Although there are differences between the two indices in June 1998, July 2014, and March 2021, the
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Japan Center for Economic Research

Released on April 26, 2022

discrepancies between the two indices ("New Index" - "Estimated Value") are still very small, and theaverage difference over the period is about 0.000001pt.
Figure 4. Difference between the New Index and the Estimated Value
0.003

NewIndex >EstimatedValue(points)
July, 2014

0.002
0.001
0.000-0.001

Estimated
Value >
NewMarch, 2021 Index-0.002-0.003

June, 1998
9799

01

03

05

07

09

1113

15

17

19

Note: Data is up to April 8, 2022.
Source: Estimated by Japan Center for Economic Research based on Bloomberg and FactSet

22/04
21
WeeklyBased on the comparison above, we believe that using and connecting the RFR-based dollar
funding premium (concretely, change in the RFR-based dollar funding premium) as an alternativeindicator to the previously used LIBOR-based dollar funding premium from January 2022 will enable
us to calculate and update the Index while maintaining as much continuity and consistency with theunderlying data and the index values that have been published to date.

≪Reference≫
Iijima, S., Hosokawa, T., Oda, T., and Tao, K., 2022. “On the Points to Consider in Monitoring Dollar
Funding Premiums after LIBOR Publication Suspension,” February 25, 2022, Bank of Japan
Review 2022-J-3. (In Japanese)
The Japanese Bankers Association “LIBOR Transition” Accessed on April 25, 2022.

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