Negative-Rate Lending Closer to Reality in Japan as Tibor Slumpsby and
Three-month Tibor drops to record low after BOJ policy easing
Negative-rate lending possible if Tibor below zero: SMBC Nikko
Japan’s banks may soon have an incentive to pay borrowers to accept loans, if they can raise funds at even cheaper rates.
Negative interest-rate lending has become more of a possibility since the Bank of Japan started levying charges on idle cash. Lenders can now borrow for three months in the Tokyo interbank market at a record-low 6 basis-point annualized rate, versus 17 basis points since the BOJ move in January. They may eventually be able to be paid to borrow and then profit by paying less to lend, according to Credit Suisse Group AG, JPMorgan Chase & Co. and SMBC Nikko Securities Inc.
“Banks paying interest to borrowers is possible if the Tibor goes negative,” said Shinichiro Nakamura, a senior analyst in Tokyo at SMBC Nikko Securities, a unit of Japan’s second-biggest lender by market value. “Many large-cap companies in Japan are borrowing funds from banks around the same level as the Tibor.”
The prospect of paying to lend isn’t a cheerful one for Japanese banks, which already slowed their loan growth to 2 percent in March amid shrinking profit margins and slumping confidence among customers. Negative-rate loans would hurt margins at banks, which find it hard to charge customers for deposits, so they will focus on areas such as fee businesses and foreign investments, according to Pacific Investment Management Co.
If the Tibor falls to minus 0.2 percent, “it would make sense to lend at minus 0.1 percent to companies with little credit risk,” said SMBC Nikko’s Nakamura. He expects the BOJ to cut the interest on some reserves by another 10 basis points to minus 0.2 percent by March 2017.
Banks face penalties if they increase cash holdings significantly and thereby “decrease” the effects of negative rates, according to a Jan. 29 statement by the BOJ.
The yen London interbank offered rate has already dropped below zero. Companies including Takeda Pharmaceutical Co. and Mitsubishi Corp. have taken out loans at one basis point over the three-month yen Libor, according to data compiled by Bloomberg. If they refinance with the same terms, they would in effect borrow at a negative rate based on current Libor levels.
“There’s a possibility that syndicated loans for the most highly regarded companies will have negative rates,” said Takashi Miura, an analyst in Tokyo at Credit Suisse.
Some don’t think minus-rate loans are likely in Japan. The nation’s Financial Law Board, a committee that advises on banking regulations, said in a report that a lender probably wouldn’t pay the borrower unless there’s a special agreement between the two.
Whereas Japanese sovereign bonds have minus yields because of expectations the BOJ will buy those notes from the market as part of its stimulus steps, the central bank isn’t pursuing a policy like that for loans, meaning that negative-rate lending won’t happen now, according to Toshihiro Uomoto, the chief credit strategist in Tokyo at Nomura Holdings Inc.
Some Japanese companies are already getting paid to borrow in debt markets. Sumitomo Mitsui Finance & Leasing Co. got a rate of minus 0.001 percent when it raised 5 billion yen ($46 million) in March via the sale of six-month six-month commercial paper.
Banks in Europe haven’t been lending at negative rates in spite of an earlier start of a minus-rate policy because base lending rates are higher than in Japan, according to Toyoki Sameshima, an analyst at BNP Paribas SA in Tokyo.
Germany’s average effective lending rate to non-financial companies was 2.2 percent in March while a similar gauge for France was 1.89 percent, according to data from the two nation’s central banks. The average rate on new loans in Japan was 0.793 percent in February, BOJ data show.
If Japanese banks do lend at rates below zero, that may hurt their bottom line.
“Because it is difficult for banks to charge negative rates to customers for deposits, this will likely lead to net interest margin compression and deterioration in profitability,” Raja Mukherji, the Hong Kong-based head of Asian credit research at Pimco, wrote in a report.