, intensive research has been conducted to discern the main drivers behind these price developments. at this juncture, three factors have been identified as important. the first, and the most fundamental driver, has been the tightening of demand and supply conditions ( figure 2 ). on the one hand, the rapid growth of the global economy, notably in emerging economies, has been a major factor behind strong commodity demand. on the other hand, a long period of underinvestment, coupled with geopolitical and climate - related shocks, has severely constrained supply growth. consequently, as inventories and spare capacity have declined, commodity markets have become increasingly vulnerable to various see report of the g20 study group on commodities under the chairmanship of mr. hiroshi nakaso, november 2011. bis central bankers ’ speeches shocks in both demand and supply. the tariffs, export restrictions and other ad - hoc measures adopted by some countries may also have aggravated market imbalances. the second factor driving these fluctuations in commodity prices is global monetary conditions. accommodative monetary conditions, especially in the aftermath of the global financial crisis, seem to have contributed to the rise in commodity prices in various ways ( figure 3 ). in particular, monetary policy affects aggregate demand in general, which in turn influences the demand for commodities. on top of these two factors, the third driver is what might be described as “ financialization ” ( figure 4 ). partly influenced by globally accommodative monetary conditions, financial investors have entered the commodity markets and changed market participants ’ behavior in important ways, especially with respect to appetite for portfolio rebalancing and carry trades. in fact, during the past several years, the rise in price levels and volatility in commodity markets has coincided interestingly with the growing rate of participation of financial investors in these markets. 3. growing importance of financial investors investment in commodity - related financial products has increased considerably both in quantity and scope in recent years. the estimated market value of commodity - related assets under management reached almost 450 billion usd by mid - 2011, from only 260 billion usd in mid - 2008. both instruments and players have diversified considerably. in addition to the traditional commodity investors, such as commodity trading advisors ( ctas ) and commodityspecialized hedge funds, index investors and etf sponsors have become prominent players. moreover, we now observe very active participation of various hedge funds, proprietary trading desks of banks, broker - dealers and trading units of large non

kiyohiko g nishimura : financial factors in commodity markets speech by mr kiyohiko g nishimura, deputy governor of the bank of japan, at the paris europlace international financial forum, tokyo, 28 november 2011. * 1. * * introduction i feel privileged to have the opportunity today to speak at this international financial forum organized by paris europlace. this is my second time to stand before you, following my presentation last year. it is always a great pleasure to join this forum, since paris europlace has been playing a pivotal role in providing opportunities for market participants to deepen mutual understanding. i salute the members of paris europlace for their dedication. it is also a great pleasure to have our friend christian noyer, governor of the banque de france, among our distinguished participants. i would like to take this opportunity to extend my sincere gratitude to christian and the banque de france for their invaluable support under the french presidency, for the work of the g20 study group on commodities, chaired by my colleague hiroshi nakaso. 1 my presentation today, in which i would like to share with you some of the findings of the study group, has profited greatly from such cooperative work between the banque de france and the bank of japan. however, the views expressed hereafter are my own, and do not necessarily represent the views of the study group. last year, i discussed in some detail the nature and impact of electronic trading in financial markets, examining how the global expansion of electronic trading has affected market microstructure. today, i will focus on another significant development : that is, the growing influence of financial factors on commodity markets. in fact, my presentation this year is in many ways a sequel to the one last year, not only because both presentations aim to shed light on financial innovations in the various markets, but also because electronic trading is an important issue per se in commodity markets. i will come back to this point later. 2. high and volatile commodity prices commodity prices have been fluctuating considerably both in terms of speed and amplitude. a surge in commodity prices until 2008 was followed by a sharp downfall in the midst of the financial crisis. prices rose again from early 2009 to levels comparable to the peaks reached in 2008, though they had again declined until recently ( figure 1 ). these see - saw developments pose a serious challenge to policymakers when dealing with, for example, inflationary pressures. consequently