Photographer: Tomohiro Ohsumi/Bloomberg

Japan's Money Market Shows Signs of Life

  • Banks have become accustomed to negative-rate environment
  • BOJ created tiered system to limit negative side effects

For Japan’s money market, it turns out that there’s life after negative interest rates after all.

In a development that marks a win for Bank of Japan policy makers anxious to preserve a key cog of the financial system, the volume of interbank loans is recovering following a sharp pullback in the aftermath of the introduction of a negative rate on a portion of banks’ reserves.

Logic might dictate that no lender would extend uncollateralized credit overnight only to get repaid less the next day. But with the BOJ continuing to buy massive amounts of government bonds, banks are receiving further waves of cash from the central bank that they need to deploy in some fashion. For those lenders that have so much in cash reserves that they’re being charged the minus 0.1 percent rate set by the BOJ for a share of the surplus, there’s an incentive to offer funds to other banks at a lesser negative rate.

"More financial institutions are now able to handle negative rates on their systems, which initially weren’t structured to manage funds with negative rates in mind," said Kiyoshi Iida, a senior market economist at Totan Research Co. in Tokyo.

A functioning money market is viewed as essential by the BOJ to ensure that lenders have ready access to funds to settle all accounts, and it has at times in its past been a consideration when deciding on interest rates. The embers of a market offer policy makers the opportunity of a broader-based revival should they be in position to normalize rates down the road.

"Transaction volumes in the money market will revive after the BOJ exits from the current policy," said Tomo Kinoshita, chief market economist at Nomura Securities Co. in Tokyo. For now, he doesn’t see that outcome at least for a couple of years, given the scant signs of the central bank hitting its 2 percent inflation target.

— With assistance by Chikako Mogi

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