Paying to Lend Thaws Japan Money Market as Trusts Charge Savers

  • Call market balance more than doubles from record low
  • Overnight borrowing rates reach -0.081%, near BOJ benchmark

Tokyo’s money market is thawing as banks realize it’s better to pay interest to lend than face the cost of keeping money at the Bank of Japan.

The outstanding amount of overnight interbank loans has more than doubled from a record low and the average interest rate reached a record at minus 0.081 percent, near the BOJ’s negative benchmark. Because the central bank only charges fees for new reserves that aren’t mandatory, it has taken time for the nation’s lenders to adjust their policies. Trust banks started to charge savers to accept cash on April, analysts said.

QuickTake Negative Rates

“The market is starting to function again,” said Kenji Sato, a manager at the planning and research department of Central Tanshi Co., a Tokyo-based money-market dealer and broker. “The situation is far more welcoming than in February or March. For trading volume to expand further, it’d be good to see larger banks, which can take money in big lots, participate.”

Signs of life in Japan’s ground zero for bank financing suggest that lenders are beginning to adjust to Governor Haruhiko Kuroda’s January decision to use negative rates as a policy tool to jump-start economic activity and push inflation toward his 2 percent target. Kuroda said in a speech on March 7 that transactions can “be profitable for both sides” as long as they take place at rates less negative than the BOJ’s minus 0.1 percent benchmark.

The volume-weighted average of the unsecured overnight call rate fell toward the BOJ’s policy rate in April, and was at minus 0.063 percent Monday. Just a month ago, it was barely below zero. The call market’s recovery coincided with the period when trust banks began charging some clients on their cash deposits from April 18, said Toru Suehiro, senior market economist at Mizuho Securities Co. in Tokyo.

Current-account balances at the BOJ are divided into three tiers with different rates: negative, positive and zero, according to a central bank statement released on Jan. 29. Kuroda has said that the system, which is used by some central banks in Europe, aims to “ensure that transactions continue to take place in the short-term money market.”

“Trust banks bear a huge burden from this policy, and their move may have triggered other market players to trade in the market,” Mizuho’s Suehiro said. “It remains to be seen whether the balance between the tiers among different sectors will become more equal.”

Trust banks were charged on 19 percent of their current-account balances in the month through May 15, down from 37 percent one month earlier, according to BOJ data. Major lenders had no reserves subject to negative rates, while regional banks were charged on 2 percent. Other institutions, which include Japan Post Bank Co., faced fees on 16 percent.

In the interbank market, investment trusts make up most of the lenders and there is a growing number of new borrowers, according to Central Tanshi’s Sato, who said trust banks may be charging 10 basis points on deposits to offset minus rates. A basis point is 0.01 percentage point.

“As fees force investment trusts to lend at negative rates, trading is growing and markets are gradually matching the BOJ’s intention,” said Naoya Oshikubo, a rates strategist at Barclays Plc in Tokyo. “If more banks face charges or those holding excess reserves start lending in markets, volume will increase further.

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