Japan's financial deregulation and linkage of the Gensaki and Euroyen deposit markets

This paper examines whether Japan's financial deregulation weakened the linkage between the Euroyen and Gensaki markets. It defines and analyses the linkage of the two markets in terms of the persistence and predictability of yield spreads, as well as cross-market causality. By using Johansen tests and an error correction model, this paper shows first, cross-market causality before and after deregulation; and second, one common trend in interest rates, substantial Gensaki—Euroyen yield spreads, and a slower response of the one-month Gensaki—Euroyen yield spread to a shock after deregulation.