development and the effects on and implications for japan through the looking glass of the fx swap market. changes in the market structure of foreign exchange swaps as described earlier, major japanese banks, which can tap a relatively wide range of funding markets, are currently refraining from heavily using the fx swap market for their u. s. dollar funding ( chart 7 ). having said that, statistics for japanese financial institutions as a whole indicate that there are large funding increases in that market ( chart 10 ). this reflects the increasing demand for hedging dollar exposures from financial institutions that have limited funding options compared with major banks. looking at the statistics on outstanding external securities investments by financial institutions, non - banks - - such as insurers, pension funds, and investment trusts - - are increasing their investments as fast as banks ( chart 11 ). while pension funds are not expected to hedge their exposures, life insurers seem to be hedging slightly less than 70 percent of their foreign currency exposures in recent years. investment trusts also seem to hedge their foreign exchange risk in response to requests from investors, such as banks or households. against this increased hedging demand, as u. s. banks refrain from engaging in arbitrage trading in response to regulatory requirements, we see increasing relative importance of non - banks - - such as sovereign wealth funds ( swfs ), reserve managers of emerging market economies, and private investment funds - - as suppliers of u. s. dollars in the fx swap market. the existence of dollar funding premia in the swap market signifies an opportunity for suppliers of u. s. dollars to obtain yen funding at a very low rate. as a result, overseas non - banks that have dollars to spare can invest as to runnable debt, see bao, j., j. david, and s. han, " the runnables, " feds notes, september 3, 2015. for example, see financial stability board, " global shadow banking monitoring report, " 2015. in japanese government securities ( jgss ), even if the nominal yields on such paper are zero or negative, and secure yields as good as or higher than u. s. government securities without taking on foreign exchange risk. the fact that transaction volumes of fx swaps are positively correlated with inward bond investments underscores the investment patterns of overseas non - banks regarding fx - hedged investments in jgss ( chart 12 ). in an environment where the demand

the transaction volume in the fx swap market ( usd / jpy ) is the average ( via tokyo fx market brokers ) for each business day and includes outright forwards. sources : ministry of finance ; boj. chart 13 global liquidity amplification mechanism through the fx swap market us monetary policy ( interest rate hike ) ？ spillover slowdown in em economies decline in oil prices while arbitrage trading by banks has declined due to regulations, real money investors have enlarged their footprint in the fx swap market em capital outflows swfs and fx reserve managers reduce d the h supply l off usd in i the h fx swap market rise in fx swap implied usd funding rate global banks ( non ‐ us banks ) curtail usd ‐ denominated lending to ems