Japan Negative Rates Drive Biggest Lenders From Overnight Marketby and
Three of five largest say minus rates complicate call funding
Some banks relying on repurchase agreements to raise cash
A majority of Japan’s biggest private lenders are still unwilling to borrow from the market for overnight loans almost six months after the Bank of Japan announced its negative interest-rate policy.
Three of Japan’s five largest lenders by market capitalization said they were not tapping the unsecured overnight call market for funding, according to a Bloomberg survey this month of Bank of Tokyo-Mitsubishi UFJ Ltd., Sumitomo Mitsui Banking Corp., Mizuho Bank Ltd., Sumitomo Mitsui Trust Holdings Inc. and Resona Holdings Inc. Two said they are raising funds from the market to maintain relationships with clients.
The outstanding amount of overnight interbank loans is less than half the size on Feb. 15, the day before the BOJ began charging some lenders on their excess reserves as part of its effort to stimulate the economy. Japan’s main bank lobby hinted last week that the BOJ was right to keep monetary stimulus unchanged on June 16, saying the impact on lenders would be “more severe” if negative rates are expanded.
“A decline in money-market function in general occurs when interbank credit risks emerge,” said Yasunobu Katsuki, a senior analyst at Mizuho Securities Co., noting that the current situation is a result of negative rates and quantitative-qualitative easing. “It is a market for day-to-day financing and when risk emerges, its transmission is much faster than in bond markets.”
Among the banks surveyed three said they are tapping the repurchase market because it’s liquid, trading is anonymous and a large amount of funds can be procured. Three said the negative rate environment makes it difficult to borrow from the unsecured overnight call market. The banks asked not to be identified.
The volume-weighted average of the unsecured overnight call rate was at minus 0.061 percent Wednesday, after touching a record minus 0.081 percent in April, compared with the BOJ’s policy rate of minus 0.1 percent. The yield on Japan’s benchmark 10-year government debt was little changed at minus 0.14 percent as of 1:08 p.m. in Tokyo Thursday. Yields on bonds with maturities ranging from five to 40 years hit record lows last week, inverting the front of the so-called yield curve.
“Big banks are conducting funding operations to avoid having reserves subject to the negative rate, so it’s hard to see them stepping into the market,” said Izuru Kato, president of Tokyo-based Totan Research Co. “Activating money markets under negative rates sounds futile. To do so, the yield curve has to have a positive slope,” where long-term yields are higher than short-term yields, he said.
BOJ Governor Haruhiko Kuroda has said minus rates are part of a three-tier system that aims to ensure transactions continue to take place in the short-term money market. Kuroda said on Monday that the drag on banks’ profits because of negative rates is limited.
To avoid getting charged on excess funds, some Japanese trust banks are lending in the call market, said Kenji Sato, a manager at the planning and research department of Central Tanshi Co., a Tokyo-based money-market dealer and broker. Japan’s ground zero for bank financing is becoming more polarized between financial institutions that need to lend to reduce charges on excess funds and those that don’t, he said.
“What is needed to bring activity to the next stage is the participation from top banks,” Sato said. “Their presence is needed for a further boost.”