Kuroda Loan Spigot Drowns Japanese Yield Curve as Banks Buy
The Bank of Japan’s low-interest loan program has spurred buying of higher-yielding sovereign debt. How much it has fueled economic growth is up for debate.
The extra yield investors demand to hold Japan’s 10-year government bonds over five-year securities dropped to 38 basis points today, the least since May 2013 and lower than the similar U.S. (USGG5YR) spread of 84 basis points. While outstanding lending to companies increased 2.2 percent from a year earlier in May, the total amount of 275.7 trillion yen ($2.7 trillion) remains below levels in 2009, according to BOJ data.
BOJ Governor Haruhiko Kuroda is making 30 trillion yen available to banks to encourage financing under a program offering 0.1 percent loans for as long as four years. Even as it has never been cheaper to borrow long term in Japan, deposits exceeded loans by a record 194.2 trillion yen in June, leaving financial institutions with excess cash to park in JGBs.
“The BOJ’s lending facilities are big catalysts for the yield decline in Japan’s short- to mid-term government securities,” said Shogo Fujita, the chief Japan bond strategist at Bank of America Merrill Lynch in Tokyo. “Provision of low-interest loans for a relatively long period tends to spur investments in higher-yielding assets. The JGB yield curve will flatten further.”
Japan’s 10-year bonds yielded 0.54 percent today, the least globally. The 38 basis-point spread with five-year yields compares with a 61 basis-point gap in the U.K. (GUKG5), where the Bank of England also offers cheap money in a range of facilities. A basis point is 0.01 percentage point.
The Bloomberg Japan Sovereign Bond Index (BJPN) last week reached the highest since it was formed in January 2010. The gauge has risen 1.6 percent this year as the BOJ continues to buy about 7 trillion yen of government notes a month. Thirty-two percent of economists in a Bloomberg survey forecast policy makers will expand stimulus on Oct. 31.
The BOJ expanded in February the low-interest loan program that was in place since December 2012. Starting last month, banks can borrow as much as twice the amount of their net increase in lending, which previously served as a cap. The Bank of England and the European Central Bank have adopted similar measures.
“As long as banks lend, they can get double the amount of funds to buy whatever they want,” said Bank of America’s Fujita. The BOJ also benefits because “compressing medium-term rates and keeping 10-year yields capped can prevent the yen from strengthening.”
Weakening the Japanese currency to spur inflation is part of the BOJ’s strategy to encourage investment in riskier securities. The yen plunged 18 percent against the dollar last year. It traded at 101.64 as of 10:27 a.m. in Tokyo today, 3.6 percent higher this year.
The five-year swap rate dropped to 0.2425 percent on July 11, the lowest since June 2003. The gauge reflects what borrowers pay to exchange their fixed-income interest payments for floating ones.
“Financial companies borrowing from the BOJ under the loan facility are receiving swaps and indirectly causing nominal short- to mid-term yields to fall,” said Naomi Muguruma, a Tokyo-based senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co.
Large companies across all industries plan to increase capital spending 7.4 percent this fiscal year through March, the highest since the last quarter of 2007, according to the central bank’s quarterly Tankan survey.
Even so, banks are hesitant to stop channeling customer deposits into government bonds rather than extending loans. Lenders’ holdings of JGBs totaled 130 trillion yen at the end of March, a separate BOJ report showed. Domestic long-term lending rates dropped to a record low 0.815 percent in May.
“New demand for lending still struggles to increase despite low interest rates,” said Makoto Noji, a senior debt strategist in Tokyo at SMBC Nikko Securities Inc. “Money gets passed on and eventually ends up in JGBs.”