Joachim Nagel: Launching a trading desk in Tokyo
Welcoming remarks by Dr Joachim Nagel, Member of the Executive Board of the Deutsche
Bundesbank, at the opening of the enlarged office of the Deutsche Bundesbank in Tokyo,
Tokyo, 6 September 2012.
* * *
1. Introduction
Governor Shirakawa,
Vice Minister Nakao,
Ladies and Gentlemen,
I would like to convey my sincerest gratitude to all those who have helped us to establish a
trading desk in Tokyo, especially the Bank of Japan. I would also like to thank the Ministry of
Finance and the Financial Services Agency very much for their support.
Our decision to start trading operations in Tokyo has attracted some attention. I think it would
therefore be useful to provide you with some background information on this matter.
2. The Deutsche Bundesbank's foreign reserves
As trading operations in Tokyo form part of the management of foreign exchange reserves,
let me first provide you with some basic information on the Bundesbank's foreign reserves.
Foreign reserves have three main components: foreign exchange, the position with the IMF
and gold. Germany's foreign exchange reserves amount to around EUR 31 bn., of which the
majority is invested in US dollar, and also a share is invested in Japanese yen. For many
years, the total volume of the foreign exchange reserves has been kept quite stable. Due to
the valuation at market prices, the share of gold within the Bundesbank's reserves has
increased significantly during recent years. The composition of the reserve assets is less the
result of a portfolio optimisation strategy than, first and foremost, a response to gold transfers
under the Bretton Woods System and to foreign exchange interventions prior to the launch of
European monetary union.
The management of the Bundesbank's US dollar und Japanese yen portfolio is based on the
principles of safety, cost efficiency and liquidity. The trading office in Tokyo will essentially be
responsible for executing purchases and sales of Japanese government bonds during Tokyo
trading hours. The Bundesbank's Central Office in Frankfurt will remain responsible for
making strategic decisions and coordinating investment activities.
3. On-site reserve management
In April 2009 the Bundesbank started to use the premises of its Representative Office in New
York to launch a trading desk for reserve management operations in US Treasuries and
money market instruments such as repos. So why do we also trade outside of Frankfurt?
Trading activities create contacts with market partners and enable Bundesbank traders and
analysts to increase their knowledge of financial market developments on site. Through their
physical presence at financial centres, they gain access to additional market information and
benefit in other ways through having local contacts. The Deutsche Bundesbank's Markets
Department condenses this information and makes it available internally through its daily
market reports from New York. The Bundesbank expects the trading desk to strengthen
contacts with local banks and institutions. A physical presence on site and a network of
contacts will contribute in many respects to a better understanding of financial market
developments both in and beyond Japan. The Bundesbank will benefit from this, not only
with regard to the management of its foreign reserves. The provision of regular market
reports and the establishment of contacts will also benefit the Bundesbank's internal bodies.
This will strengthen the Bundesbank's hand when contributing its expertise to international
committees (BIS, IMF, G7) and when fulfilling its role in the Eurosystem.
In addition to business relationships with local market participants, the trade contacts will
provide a "springboard" for making new contacts. Experience gained operating our trading
desk in New York shows that a physical local presence intensifies contacts with market
participants for both the trading desk itself and the Representative Office. Particularly during
the current crisis, the Bundesbank has benefited from an enhanced flow of information.
4. Business case for an Asian trading desk in Tokyo
Looking at the time difference, it is clear that the positive experience in New York is an
equally convincing argument for an office in Asia. The trading day in Tokyo ends when
European trading hours begin. There was no doubt over which location would be most
suitable in Asia, as the Bundesbank already has a Representative Office in Tokyo. The
enlargement of our Tokyo office bears witness to the increasing economic and political
importance of Asia. Maintaining and strengthening contacts with Japanese market players
and the Bank of Japan - the central bank of Asia's traditional economic centre - will
strengthen the Bundesbank's role in the Eurosystem and in international cooperation. One
particular argument in favour of a local presence is the Japanese market, which has a high
proportion of domestic investors and influences.
The Bundesbank has now had an office in Tokyo for 25 years. Japan is one of the largest
economies in the world. Germany and Japan are closely connected. Most importantly, the
investment of foreign reserves in Japan has forged a strong link between the Bundesbank
and the Bank of Japan. The Japanese yen is an important reserve currency in view of its
relevance in foreign exchange markets, where it is has the third largest turnover of any
currency after the US dollar and the euro. The USD/JPY currency pair is also one of the most
frequently traded in the world, second to EUR/USD (BIS: Fx-Triennial Survey, 2010).
Furthermore, on-site trading in Japan will permit us to deepen our contacts with the trade and
settlement sections of the Bank of Japan, which manages accounts and safe custody
accounts for the Bundesbank within the context of foreign reserve management. The
Bundesbank also expects this closer contact to yield additional knowledge about the
functioning of the Japanese economy and monetary policy. Furthermore, it will enable
contacts with the Bank of Japan to be strengthened at a political level, too.
The Bundesbank's trading desk in Tokyo will allow it to conduct trading during those hours
when Tokyo's daily trading volumes are at their heaviest. Until now, the time difference has
prevented the Bundesbank from trading during this market phase and it is therefore currently
unable to directly respond to economic data or unexpected market events in Japan. In this
respect, the opportunity to trade in Tokyo will minimise potential losses and help limit risks for
investment committee and trading positions. Furthermore, trading during the Tokyo trading
hours will create, in particular, significant scope for reducing transaction costs. Compared
with the European trading hours, the bid-ask spreads will decrease significantly owing to the
greater trading volume and higher level of market liquidity. We are taking advantage of this
by shifting a part of our trading activity to this time zone.
5. Conclusion
There is no doubt that it is now more important than ever for us to gain a deeper
understanding of Japan, Asia and the Pacific region. The Representative Office and the new
trading desk will be our window to the Asia-Pacific region. Expanding our presence in Tokyo
reflects the importance of the Japanese financial market and the growing influence of the
region in the global economy.
The new trading desk will be a great enhancement to the Bundesbank's Representative
Office, which already has a long and successful history. Today we want to celebrate this
launch with you. I hope you enjoy the reception.