Abe’s Easing Push Fuels Speculation on Negative Yields for BOJ

Prime Minister Shinzo Abe’s push for more easing by the Bank of Japan is fueling speculation that it may have to accept negative interest rates on the bonds it buys from financial institutions.

“It’s possible that negative rates will become a usual feature,” of the BOJ’s bond-buying operations, said Makoto Yamashita, chief Japan rates strategist at Deutsche Securities Inc. in Tokyo, adding that it could happen as soon as the central bank’s next operation.

Yields on Japan’s two-year notes fell to 0.03 percent today, the lowest since 2002, as investors expect the early resignation of BOJ Governor Masaaki Shirakawa to hasten more aggressive easing measures. Cutting the 0.1 percent interest that the BOJ pays on lenders’ excess deposits, a move that policy makers have discussed, could lead to negative yields on bonds bought by the central bank, said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo.

“Investors are seeing more aggressive easing, including a potential cut of the rate on excess reserves,” said Yajima.

The rate provides a floor for interest rates and prevents other rates from falling below 0.1 percent, said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co.

Not all analysts agree with the speculation.

“It’s unlikely the BOJ will have to accept negative rates because it can still manage to fulfill its pledged bond purchases,” said Soichiro Monji, chief strategist at Tokyo-based Daiwa SB Investments Ltd., which manages the equivalent of about 6 trillion yen ($64 billion). “Cutting the rate on reserves will probably have some impact on yields of long- and super long-term bonds, but it won’t last.”

Pros, Cons

BOJ board member Takehiro Sato told reporters after a speech yesterday that the central bank would have to weigh the positive and negative aspects of scrapping the rate on banks’ excess reserves. Buying bonds with negative yields could create imbalances in financial markets by being seen to add to banks’ profits, he said.

The central bank has pledged to buy about 20 trillion yen more government bonds in its funding operations by the end of this year. Shirakawa said this week he will step down on March 19 instead of of the scheduled end of his five-year term on April 8.