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BOJ Deposit Rate Cut Sign in Cash Operation Flops: Japan Credit

BOJ Deposit Rate Cut Sign in Cash Operation Flops
The Bank of Japan headquarters stands in Tokyo. The BOJ’s increased cash infusions in the past two years have failed to end more than a decade of deflation as it remains reluctant to carry out more-radical policy options. Photographer: Tomohiro Ohsumi/Bloomberg

The failure of seven funding operations by the Bank of Japan is signaling expectations that policy makers will cut deposit rates.

Bids for the BOJ’s offering of six-month 0.1 percent loans dropped to a record yesterday, falling short of the bank’s target a day after the yield on Japan’s two-year note slid to 0.08 percent, a level unseen since July 2005. The 0.1 percent savings rate compares with 0.25 percent on excess reserves in the U.S. and zero in the euro region.

Japanese banks have watched the deposit rate when setting lending rates after the BOJ reduced the amount it charges for overnight funds to almost zero in 2010. At least two board members have highlighted the benefits of lowering the savings benchmark as Prime Minister Shinzo Abe calls for “bold monetary policy” to defeat deflation and drive the yen lower. The central bank will start a two-day policy meeting on Jan. 21.

“Considering the current outlook for rates, banks have no incentive to borrow,” Takafumi Yamawaki, Tokyo-based chief rates strategist at JPMorgan Chase & Co., one of the 24 primary dealers obliged to bid at Japan’s debt sales, said on Jan. 16. “Six-month loans at 0.1 percent will become relatively expensive if the deposit rate is cut.”

Banks receive 0.1 percent interest on deposits held by the BOJ that exceed legally required balances. The central bank introduced the measure after the collapse of Lehman Brothers Holdings Inc. in 2008 that triggered a global financial crisis.

Reluctant BOJ

Unlike the BOJ, the Federal Reserve pays interest on both required and excess reserves. The European Central Bank cut the deposit rate on July 5 by 25 basis points to zero. That helped trigger a drop in the euro to a two-year low, while Germany’s two-year note yields slid to a record negative 0.097 percent.

The BOJ’s increased cash infusions in the past two years have failed to end more than a decade of deflation as it remains reluctant to carry out more-radical policy options. Abe is counting on a weaker yen to bolster an economy that’s estimated to have shrunk for a third consecutive quarter through Dec. 31.

At the BOJ’s last gathering in December, the board voted down a proposal by Koji Ishida to scrap the interest on excess reserves held in custody. Fellow board member Sayuri Shirai said in a speech last week that “positive aspects” of cutting it include currency depreciation.

Japanese Finance Minister Taro Aso said today that the BOJ and the government will issue a joint statement at the central bank’s meeting next week. BOJ Governor Masaaki Shirakawa said he exchanged opinions at a meeting in Tokyo with Aso and Economy Minister Akira Amari.

Goldman Uridashi

Elsewhere in domestic credit markets, Goldman Sachs Group Inc. plans to price seven-year yen uridashi bonds on Jan. 24, the company said in a filing yesterday to Japan’s Finance Ministry. Uridashi notes are securities issued overseas and sold to individual investors in Japan.

Hokkaido Electric Power Co. hired banks for an offering of three-year debt this month, according to a statement from Mizuho Financial Group Inc., which is managing the deal with Daiwa Securities Group Inc. and SMBC Nikko Securities Inc.

Five-year credit-default swaps that insure Japan’s sovereign debt climbed to 88.3 basis points yesterday, the highest since Aug. 1, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. An increase in the contracts signals worsening perceptions of creditworthiness, while a decrease suggests the opposite.

Falling Yen

The yen has tumbled 13 percent over the past three months, making it the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It fell 0.2 percent to 90.05 per dollar at 1:41 p.m. in Tokyo after touching 90.21 earlier, the weakest since June 23, 2010.

A weaker yen typically makes Japanese-made products more competitive overseas, helping exporters stay competitive against rivals such as Samsung Electronics Co.

South Korea’s won strengthened 23 percent against the yen last year, the most on record going back to 1982. Bank of Korea Governor Kim Choong Soo said on Jan. 14 that the nation needs an “active” response in case exchange-rate volatility rises.

Financial companies in Japan asked for 12 billion yen ($133 million) of six-month loans from the BOJ yesterday, the lowest on record and below the 800 billion yen available. Bids for three-month credit also fell short of the central bank’s offer. The lending is part of BOJ policy measures introduced in October 2010 in an effort to support the economy.

Lingering Deflation

The program also includes a 76 trillion-yen fund that buys assets, including government bonds maturing in three years or less. While the so-called asset-purchase fund has grown from 5 trillion yen since its inception, consumer prices excluding fresh food fell every month at an average of 0.2 percent.

“What the market is expecting is a cut in the deposit rate as well as purchases of longer-maturity debt,” said Tanji Noriatsu, a Tokyo-based strategist for fixed income at Barclays Plc, also a primary dealer. Even so, “a lower deposit rate will have almost no impact over the economy.”

The yield on Japan’s benchmark 10-year note fell to as low as 0.73 percent yesterday, 4 1/2 basis points from the least in nine years reached Dec. 6. It traded at 0.745 percent today. The five-year yield was at 0.15 percent, a 1/2 basis point, or 0.005 percentage point, from matching a record low. The two-year rate touched 0.07 percent, the lowest since July 2005.

Inflation Target

The BOJ’s Shirakawa and his fellow board members will adopt the 2 percent inflation target advocated by Abe, doubling its existing goal of 1 percent, according to people familiar with central bank officials’ discussions. Shirakawa is due to step down on April 8, while his two deputies’ terms end on March 19.

The Ministry of Finance sold three-month bills at an average yield of 0.093 percent yesterday, the lowest since September 2011. Investors bid 14.76 times the amount on offer, the lowest so-called bid-to-cover ratio since April.

“The BOJ is facing policy deadlock so it has to have a deposit-rate cut as an option,” said Satoshi Yamada, Tokyo-based manager of fixed-income trading at Okasan Asset Management Co., which manages the equivalent of $10 billion. “The fear that yields on short-dated notes may decline further has prompted investors to shift to longer-term securities. I expect the 10-year yield to stabilize around the 0.7 percent level.”

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