- Executives say negative-rate financing won’t spur loan demand
- Plan would face ‘rejection’ from lenders: Mizuho Securities
Japan’s major lenders wouldn’t want the central bank to pay them to borrow even if policy makers seeking to kill off deflation made such an offer, according to people familiar with the matter.
The idea of setting negative interest rates on loans to lenders surfaced earlier this year after the Bank of Japan adopted a minus-rate strategy in January. According to people familiar with talks at the BOJ in April, discussions on such a plan could happen in conjunction with any decision to make a deeper cut to the current negative rate on reserves. Hideo Hayakawa, a former BOJ executive director, said last month that giving money to lenders to take out loans would be a better stimulus tool than charging them more on central bank deposits.
Executives from five financial institutions in Tokyo, who asked not to be identified because they aren’t authorized to speak publicly on the matter, said they doubt lower rates would buoy lending amid slack demand. An improvement in profit margins would be minimal as borrowers seek further cuts to loan rates in line with a drop in funding costs, they said.
“It’s an idea that will surely face fierce rejection from banks,” said Yasunari Ueno, the chief market economist at Mizuho Securities Co. in Tokyo. “It could spark further dumping competition for bank lending rates as borrowers see the negative BOJ rate as a subsidy, further aggravating banks’ profitability. Loan rates are falling already because of slack demand.”
Even if the BOJ offered to pay banks on loans, it doesn’t mean they can ease credit requirements on borrowers in response, according to several of the banking executives in Tokyo. The impact would be limited, they said.
The BOJ is providing zero-rate loans to financial institutions through its Stimulating Bank Lending Facility, which would be the most likely vehicle for the negative rate financing, people familiar with the talks said in April.
Speculation that the BOJ will increase easing at its policy meeting ending July 29 caused Japan’s currency to tumble in the two days to July 12 in the biggest back-to-back drop since the central bank’s decision in October 2014 to expand asset purchases. The yen has declined 5.3 percent this week, set for the biggest loss in 17 years. It retreated from a 2 1/2-year high set on June 24 after the U.K. voted to leave the European Union.
“The BOJ will have to ease at this month’s meeting in response to calls to avoid the yen’s appreciation,” said Ryutaro Kono, chief Japan economist at BNP Paribas SA in Tokyo. “I think the BOJ will increase the charge and offer a negative lending rate.”
The outstanding amount of overnight interbank loans tumbled more than 70 percent on Feb. 16, the day the central bank started charging some lenders on their excess reserves. The size of the market is still less than half the size it was right before the policy took effect.
Lending growth excluding trusts in Japan is stagnating, dropping in June to levels three months earlier, while the country’s average interest rates on new loans fell to a record low 0.678 percent in May, according to BOJ data.
“It would be annoying for financial institutions to take this policy as something favorable for them,” Kunio Okina, a professor at Kyoto University and former director general of the BOJ’s Institute for Monetary and Economic Studies, wrote in an e-mail. “The issue is whether the BOJ can reconstruct the relationship with financial institutions that had chilled since the introduction of the negative rate policy through a ‘friendly’ policy.”’