##itical events, changes in the outlook on global economies, and policy changes in major economies. we also regularly check, in the financial system report, a “ heat map ” of financial activity indexes that helps us to gauge the macro conditions of bis central bankers ’ speeches financial activity by combining a host of indicators in both the financial and non - financial sectors ( chart 2 ). the indexes, with few parts in red, suggest that currently no signs of financial imbalances are observed. having said this, we will of course continue looking carefully for any signs of overheating in the financial markets. negative interest rates another development attracting attention in japan ’ s financial markets is seen in the negative interest rates of some financial products. the rates for treasury discount bills ( t - bills ) declined to negative territory in september and remained there for most of the time since then ( chart 3 ). the payment of negative interest on securities sounds counter - intuitive and thus may prompt concern that japan ’ s financial markets are suffering a serious malfunction. if we look into the details of each transaction, however, we can see plausible reasons why investors have accepted negative interest rates. let me briefly mention a few cases where investors would buy t - bills at negative interest rates. commercial banks have an incentive to hold a certain amount of liquid short - term assets for the purpose of liquidity and duration risk management. among various types of these assets, investors often prefer t - bills because they are not only eligible collateral for borrowing from the bank of japan but also most suitable as collateral pledged against other money market and derivative transactions. under the qqe, yields of liquid short - term assets have already approached zero across the board, and therefore even a small premium added to t - bills could easily push their rates below zero. foreign investors have also played an important role in driving yen rates into negative territory. since the summer of 2014, u. s. dollar funding rates implied in foreign exchange swaps have risen, as the net demand for dollars in the foreign exchange swap market has increased ( chart 3 ). this means that foreign investors with dollar cash liquidity can convert dollars into yen via a foreign exchange swap contract and borrow yen at a much cheaper rate. since yen money market rates are already at almost zero, the yen funding cost for these investors would most likely turn negative. they can take advantage of the negative funding cost by investing in t - bills even with negative rates. this investment strategy can still capture a reasonable

there is just enough market liquidity ( chart 5 ). all in all, these indicators appear to suggest that activity in the jgb market has not been affected significantly by the qqe. nonetheless, there are a number of reasons why we cannot be sanguine about the functioning of the jgb market. for instance, our market intelligence has found episodes suggesting signs of deterioration in the functioning of the jgb and related money markets that were not detected from statistical data. an example is the occasional difficulty in borrowing on - the - run jgb. besides, not a few participants point out that the jgb market functioning is undermined in the sense that the market has been overly focused on monetary policy as the factor driving prices instead of the outlook for the economy and inflation, which would otherwise be the fundamental determinant. this implies that a change in market expectations in the future course of monetary policy could exert a stronger impact on the markets. although this is not an issue of market liquidity per se, it is certainly a factor that we should take into consideration when observing market developments. against this background, the bank of japan has been engaged in intensive dialogue with a wide range of market participants to grasp the state of market functioning. as an effort along this line, we have just announced several initiatives to enhance this dialogue, including the introduction of a quarterly bond market survey of market participants ’ views on the functions of the bond market. we intend to publish the survey results. concluding remarks the pursuit of unconventional monetary actions, that are meant to be “ powerful ” as governor noyer suggests, would inevitably boost the central bank ’ s presence in the financial markets and create a resulting tradeoff between the intended policy consequences and the functioning of financial markets. to minimize the potential side effects on market functioning, the central bank should be committed to continuous dialogue with the market, so that it can share its views on its policy intention and its outlook for the economy and inflation, as well as accurately grasp participants ’ views on market developments. the bank of japan has been, and will continue to be, committed to these efforts. thank you very much for your kind attention. bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches bis central bankers ’ speeches