Negative Rates Seen Saving Japan $7 Billion as Quake Aid Mulled

  • MOF can save 800 billion yen this fiscal year: Mint Partners
  • Central bank has gifted ministry a `huge windfall': Malone

The Bank of Japan’s negative-rate policy is saving money for the government just as it needs cash to reinvigorate the economy and rebuild after deadly earthquakes.

The finance ministry is not only being paid to borrow money when it auctions debt at minus rates, it is also saving on interest payments because all sovereign bond yields are now below 0.4 percent. London-based brokerage Mint Partners estimates the government can save about 800 billion yen ($7 billion) in the year started April. That’s shoring up confidence in the world’s most indebted nation even as a ruling party politician calls for 20 trillion yen of note sales for quake relief and stimulus.

QuickTake Negative Rates

“The BOJ has just gifted the Ministry of Finance a huge, huge windfall on the fiscal side,” said Martin Malone, global macro policy strategist at Mint Partners. Negative rates are “buying time” for politicians in Japan and Europe to follow through on promised growth strategies, he said.

Prime Minister Shinzo Abe said Sunday he will create an extra budget to address quake damage in the southern island of Kyushu, and if past years are any guide, the finance ministry may be able to tap funds set aside to service debt. Fiscal stimulus is becoming more important as the BOJ reaches the limits of monetary easing, with some economists speculating it will further cut interest rates on reserves from minus 0.1 percent this week.

Extra Funds

The Finance Ministry sets aside money each year to pay the nation’s debt costs if yields rise. The MOF estimates there’s sufficient funds available now to pay even if yields surge to 1.6 percent compared with minus 0.08 percent for benchmark 10-year bonds on Wednesday.

That gap means there’s unspent money, which is generally used for stimulus - 1.3 trillion yen last fiscal year and 1.5 trillion yen the year before of unused bond cash went to help pay for extra budgets. Actual yields haven’t been anywhere near the ministry’s assumed yield since 2006.

“The debt monies are used as revenue for extra spending,” said Hidenori Suezawa, a monetary and fiscal analyst at SMBC Nikko Securities Inc.  “I think the assumed interest rate should be calculated more accurately, but it’s unclear how long current low rates will continue. If rates start going up, there’s a possibility they will shoot up to quite high levels.”

Japan now gets paid to borrow on all benchmark debt of up to 10-year maturity. Since yields went negative in 2014, the nation has received at least $1.6 billion to borrow money, according to Bloomberg calculations.

Credit-default swaps suggest that market confidence in Japan’s sovereign debt remains high. The cost to insure the nation’s bonds fell to 37 basis points last week, the lowest since September, according to CMA data.

With the government’s savings due to negative rates, “the only meaningful, tangible benefit you can get is redeploying it back in the economy,” said Raja Mukherji, the Hong Kong-based head of Asian credit research at Pacific Investment Management Co. “You need to generate growth.”

He said some bonds of big Japanese banks were attractive and the BOJ may act to help them offset losses on negative rates.

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