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BOJ Member Deposit Plan Would Unleash $373 Billion

BOJ Member Deposit Plan Would Unleash $373 Billion
The Japanese national flag flies atop the Bank of Japan headquarters in Tokyo. The central bank is under pressure to end deflation, which damps economic growth as it compels consumers to delay purchases. Photographer: Akio Kon/Bloomberg

The proposal by a Bank of Japan board member to scrap interest paid on lenders’ deposits raises the prospect of a flood of cash into a bond market where yields are near a nine-year low.

While Koji Ishida’s plan to abolish the 0.1 percent payment was rejected by a majority vote when a two-day meeting ended yesterday, incoming prime minister Shinzo Abe has called for unlimited easing until 2 percent inflation is achieved. The 10-year note yield slid for a second day to 0.765 percent today, third only to Switzerland and Hong Kong among the world’s lowest rates, as the BOJ expanded its asset-purchase program and held its separate overnight interbank lending rate at between zero and 0.1 percent.

BOJ Governor Masaaki Shirakawa has rejected proposals to cut the rate, which is now paid on $373 billion in deposits held in custody at the central bank, about equivalent to Taiwan’s economic output. Shirakawa, set to step down on April 8, said yesterday that Abe’s request for a higher price goal would be discussed at the next policy meeting and he “strongly expects” the government to play a role in defeating deflation.

“The market had already taken account of the possibility that the deposit rate may be scrapped after April, and such a chance has become more realistic,” said Makoto Yamashita, chief Japan interest rates strategist in Tokyo at Deutsche Securities Inc., one of the 25 primary dealers obliged to bid at government debt sales. Scrapping the rate would mean that short-term note yields “have more room to fall.”

Fund Increased

Yields on Japanese government securities maturing in one to three years have all collapsed to about 0.1 percent as the BOJ bought up the notes with its asset-purchase fund. The central bank yesterday added 10 trillion yen ($119 billion) to the 66 trillion-yen fund that buys assets, including government and corporate debt, to lower borrowing costs.

Japan’s 30-year bonds led gains today, with the yield falling three basis points to 1.935 percent. The 10-year rate reached 0.685 percent on Dec. 6, the least since June 2003 when all-time lows were set.

The central bank is under pressure to end deflation, which damps economic growth as it compels consumers to delay purchases. The nation’s consumer prices excluding fresh food have fallen at an average of 0.2 percent every month in the past decade.

The world’s third-largest economy is projected to shrink 0.45 percent in the three months ending Dec. 31, following the two quarters of contraction that meet the technical definition of a recession.

Lending Push

Abe, whose Liberal Democratic Party won a landslide victory in elections for the lower house of parliament on Dec. 16, has pledged to set an accord with the BOJ to aim for 2 percent inflation. The party also targets a 3 percent nominal economic growth. The BOJ set its 1 percent inflation goal in February.

“A lot of people want to cut the rate of the facility to accelerate bank lending,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co., which manages the equivalent of $122 billion, referring to the deposit rate. “Some staff members of the BOJ think that the policy would be useless in accelerating bank lending and the economy, but other members don’t agree.”

Elsewhere in the domestic credit markets, Ricoh Leasing Co., a supplier of industrial machinery, registered to sell as much as 100 billion yen of bonds, according to a filing with Japan’s Ministry of Finance yesterday. The registration, which allows for note sales without obligating the company to borrow, takes effect on Dec. 28 and is valid for two years.

Bond Issuance

Japanese companies have raised 8.2 trillion yen in bond offerings this year, little changed from the same period in 2011, according to data compiled by Bloomberg. Sales of Samurais, yen-denominated bonds by overseas borrowers, dropped 7 percent to 2 trillion yen in the period, the data show.

Corporate bonds in Japan have returned 1.3 percent this year, compared with the 1.9 percent gain for the nation’s sovereign debt and 4.8 percent for Samurais, according to Bank of America Merrill Lynch indexes. Company notes worldwide have returned 10 percent.

Five-year credit-default swaps that insure Japan’s sovereign debt were at 80.2 basis points on Dec. 20, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The index was down 63 basis points from the start of 2012, the data show. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

Yen Effect

The yen climbed 0.5 percent to 83.94 per dollar as of 12:48 p.m. today. While the Japanese currency touched 84.62 on Dec. 19, the weakest since April 2011, it was still stronger than the five-year average of 89.02.

Ishida wanted to lower the 0.1 deposit rate to affect the exchange rate, Shirakawa told reporters after the meeting. Currency appreciation makes Japanese-made products more expensive overseas and erodes exporters’ earnings.

The outstanding balance of accounts that can receive the 0.1 percent interest was at 31.3 trillion yen last month after climbing to a record 34.8 trillion yen in September, according to BOJ figures.

“The proposal of scrapping the deposit rate to zero was rejected but lowering the rate might have been approved,” said Takuma Sugawara, a senior JGB strategist in Tokyo at Societe Generale SA, another primary dealer. “Five or 10 basis points are big numbers in the bond market.”

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