Why did Japan heavily rely on Fed dollar swaps during the pandemic?

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Japan's Heavy Reliance on Fed Dollar Swaps During the Pandemic

Japan became the most significant recipient of cheap dollar funding from the US Federal Reserve during the coronavirus pandemic primarily because its domestic interbank markets struggled to provide the necessary dollar liquidity. This situation compelled Japanese banks and financial institutions to turn to the Federal Reserve's swap lines, accessing substantial amounts of dollars to maintain their overseas investments and lending activities.
Insufficient Interbank Dollar Markets

During the initial phases of the pandemic, the global financial system experienced a shortage of US dollars in interbank markets. Japanese financial institutions, which traditionally rely on these markets for their dollar needs, found it difficult to secure sufficient funding. This liquidity crunch led them to seek alternative sources, with the Federal Reserve's emergency swap facilities offering a readily available solution.
Sustaining Overseas Investments and Lending

The availability of cheap dollar funding from the Fed allowed Japanese banks and funds to continue their established practice of investing in higher-yielding assets abroad, such as US stocks and global bonds. This was particularly attractive given the near-zero returns available in Japan's domestic market. Furthermore, some Japanese commercial banks utilized these dollars to finance their overseas lending operations, especially when they lacked adequate dollar-denominated deposits to meet customer demand.
Access to Substantial Funding

From April through mid-June, the Bank of Japan was the largest user of the Federal Reserve's dollar swap facilities, drawing as much as US$225 billion. This amount represented over half of the total funding made available, underscoring the scale of Japan's reliance during this period. For instance, Sumitomo Mitsui Financial Group confirmed that it used the BOJ's dollar funding to meet customer foreign currency needs, rather than for its own investment purposes.
Shift Away from Emergency Measures

While Japan's reliance was significant, data from mid-June indicated a trend towards reducing this dependence. The Bank of Japan's outstanding dollar swaps with the New York Fed had decreased from their late May peak, although they still constituted a substantial portion of the Fed's total swaps with major central banks. This reduction was attributed to the normalization of interbank markets and the decreasing cost of dollar borrowing, making the emergency swap lines less necessary.

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Why did Japan heavily rely on Fed dollar swaps during the pandemic?

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