Cash Dethroned in Japan as Call Rate Set to Evaporate on BOJ

  • Rate was targeted by BOJ until 2013 move to bond purchases
  • Some banks not set up for negative call rate: Totan Research

Japan’s funding markets face a key challenge next week as the central bank’s decision to start charging interest on deposits prompts speculation key interbank cash rates will also drop below zero, raising the prospect of dislocations to the financial system. 

The uncollateralized overnight call market -- ground zero for funding markets as it is where banks lend to each other -- has been the only place in Japan where interest rates stayed above zero for maturities shorter than 10 years. The overnight rate was the one targeted by the Bank of Japan until Governor Haruhiko Kuroda switched to monetary base growth in April 2013 with the move to unprecedented easing.

Yields on benchmark 10-year JGBs hit a record low of minus 0.035 percent this week amid severe global financial turmoil. Speculation has grown that the BOJ will cut the deposit rate again, after announcing at the end of last month it would set it at minus 0.1 percent from Feb. 16 for some of the reserves banks hold at the central bank. Kuroda said Jan. 29 the BOJ is seeking to push down the short end of the yield curve to prompt investors to shift their money elsewhere.

Financial Turmoil

“The BOJ wants to guide the overnight call rate below zero,” said Nobuyasu Atago, chief economist at Okasan Securities Co., who was a BOJ official until recently. “But whether the path to negative rates will be smooth remains unclear given some banks aren’t ready with the infrastructure” to handle paying to lend.

The yen has surged more than 7 percent since the BOJ announced negative rates on Jan. 29, prompting speculation Japanese authorities may intervene to halt its gains. It had declined 1.9 percent on the day of the decision. The Topix index has tumbled 15 percent and bond yields have dropped to records, with the rate on five-year notes touching an unprecedented minus 0.265 percent on Wednesday. Global stocks fell into a bear market on Thursday.

Minus 0.5% Seen

Kuroda has said it is possible to cut negative rates further if needed.

JPMorgan forecasts another round of BOJ monetary easing at the bank’s March 14-15 meeting. The deposit rate may be cut to minus 0.5 percent, while bond purchases might increase to 100 trillion yen ($887 billion) a year from 80 trillion yen, said Masaaki Kanno, chief Japan economist for JPMorgan Securities, in a report. The BOJ could also announce easing at an unscheduled meeting before its March gathering, he said.

The BOJ estimates that the initial amount subject to the minus 0.1 percent deposit rate will be about 10 trillion yen. It hasn’t indicated a targeted level or range for money market rates or the amount subject to negative rate that is needed to fully exert its intended effects on financial markets. Takafumi Yamawaki, chief rates strategist in Tokyo at JPMorgan Chase & Co. said the amount subject to the negative rate may be around 30 trillion yen.

“It’s difficult to think the overnight call rate will immediately touch minus 0.1 percent on Feb. 16,” said Kiyoshi Iida, a senior market economist at Totan Research Co. “Some financial institutions are not prepared to handle negative rates on their systems. They aren’t structured to manage funds with negative rates in mind.” 

Iida said the unsecured overnight call rate may eventually stand at between minus 0.05 and minus 0.06 percent as banks with cash subject to the negative rate at the BOJ may loan funds if the call rate is above the central bank rate. If the rate isn’t favorable, they may keep the money at the BOJ.

The overnight call rate was at 0.096 percent on Friday in Tokyo, after dropping to 0.064 on Feb. 4, the lowest since June. It has ranged between 0.059 percent and 0.125 percent, on a closing basis, since the central bank stopped targeting it in 2013.

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