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Japan Develops As A Center For Weather Derivatives

The Japanese weather derivatives market put itself firmly on the map last year with a massive conference and a pick up in the number of deals. "This is the first year that there's been constant deal flow," said Hiroshi Yoshimine, global head and general manager of the derivatives and structured products division at the Bank of Tokyo-Mitsubishi in Tokyo. Yoshimine expounded that while the bank has been offering weather derivatives for two years, "[deals] weren't too common then," adding "this year the market has taken off." Toshihiko Aizawa, group leader of the product development group at the Tokio Marine and Fire Insurance Co. in Tokyo, believes the market is growing out of its infant stage. "It's become a real market now," he added, estimating the annual notional volume in Japan to be around JPY40 billion (USD321 million) for the year. "That's three to four times bigger than the previous year," said Aizawa.

A conference organized by the Weather Risk Management Association symbolized the popularity of the products, according to Hiroshi Matsui, senior manager of derivatives and fixed income at the Industrial Bank of Japan in Tokyo. "It was a big event," said Matsui, who co-chaired the conference with Tokio Marine's Aizawa, adding that it attracted 300 attendees.

The number of underlyings also increased from temperature to include rain/snow and hybrids such as a combination of temperature and precipitation. Matsui noted that day-count precipitation contracts were traded for the first time in Japan. These allow investors to protect themselves over several days in a designated period of time. "This was popular for Golden Week," said Matsui. A number of clients looked to hedge exposure in case of rainfall during the 10-day holiday in April. The Japanese market also saw its first exotic weather derivatives product purchased by a utility (DW, 12/3).

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