Why are Japanese banks reducing their reliance on Fed swap lines?

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Japanese Banks Reduce Reliance on Fed Swap Lines as Dollar Funding Costs Decrease

Japanese financial institutions are increasingly scaling back their use of US Federal Reserve (Fed) swap lines due to more favourable dollar borrowing costs and the normalisation of interbank markets. This shift signifies a move away from central bank emergency funding towards more conventional market mechanisms for acquiring US dollars.
Normalisation of Interbank Markets

Interbank markets have recovered from the stresses experienced during the pandemic, making them a more accessible and attractive source for obtaining US dollars. This normalisation contrasts with the emergency nature of the Fed's swap lines, which were established to address a potential dollar funding crunch. Consequently, Japanese banks now find it more practical to source their dollar needs through these regular market channels.
Cheaper Dollar Borrowing Costs

The cost of borrowing US dollars has become more competitive, reducing the incentive for Japanese banks to rely on the Fed's swap facilities. As dollar borrowing expenses decrease in the broader market, institutions are opting for these cheaper alternatives. This trend is further underscored by the significant decrease in the cross-currency basis swap premium, which fell from a peak of 152 basis points in March to 17 basis points currently.
Reduced Demand for Emergency Swaps

Japanese institutions, including the Bank of Japan which was a major user of the swap lines during the pandemic, are showing less interest in renewing their three-month yen-for-dollars swap contracts with the Fed. While the Bank of Japan previously accessed up to US$225 billion in such funding, its outstanding dollar swaps with the New York Fed stood at US$171.4 billion as of June 18. This reduction indicates a deliberate strategy to lessen dependence on central bank emergency provisions.
Shift in Investment Funding Strategies

The availability of cheap dollars from the Fed's swap lines had previously enabled Japanese banks and funds to continue investing in higher-yielding US stocks and global bond markets. However, with the shift back to interbank markets and improved dollar accessibility, these institutions are adjusting their funding strategies. For instance, Sumitomo Mitsui Financial Group stated it used BOJ dollar funding to meet customer needs rather than for its own investment activities.

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Why are Japanese banks reducing their reliance on Fed swap lines?

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