Kuroda neg­a­tive rate bid fiz­zles on lend­ing freeze

The Pak Banker - - COMPANIES/BOSS -

Ja­pan's banks have al­most stopped lend­ing to one an­other in the overnight mar­ket, threat­en­ing to un­der­mine the im­pact of the cen­tral bank's neg­a­tive-rates stim­u­lus.

The out­stand­ing bal­ance of the in­ter­bank ac­tiv­ity plunged 79 per­cent to a record low of 4.51 tril­lion yen ($40 bil­lion) on Feb. 25 since Bank of Ja­pan Gov­er­nor Haruhiko Kuroda on Jan. 29 an­nounced plans to charge in­ter­est on some lenders' re­serves at the mon­e­tary au­thor­ity. Bond volatil­ity has soared to a 2 1/2-year high as the evap­o­ra­tion of trad­ing vol­umes in the call mar­ket dis­lo­cates fund­ing of a range of debt in­vest­ments.

While Kuroda wants to lower the start­ing point of the yield curve to re­duce bor­row­ing costs and spur shift of funds into riskier as­sets, the in­ter­bank rate has fallen only about as far as mi­nus 0.01 per­cent, above the mi­nus 0.1 per­cent charged on some BoJ re­serves. The swings on bond yields will make it harder for fi­nan­cial in­sti­tu­tions to de­ter­mine how much busi­ness risks they can take, weigh­ing on lend­ing in a weak econ­omy even as they are pe­nal­ized for keep­ing some of their money at the cen­tral bank. "It is still un­cer­tain how deep into the neg­a­tive the overnight call rates will sink," said Naomi Mugu­ruma, a se­nior mar­ket econ­o­mist at Mit­subishi UFJ Mor­gan Stan­ley Se­cu­ri­ties Co. in Tokyo. "It won't set­tle un­til fund­ing flows in the new scheme be­come clear. That may pres­sure volatil­ity to stay high for govern­ment bonds."

The overnight rate was the BoJ's main pol­icy tar­get un­til Kuroda switched it to mon­e­tary base growth in April 2013. The cen­tral bank said the ini­tial amount to which its mi­nus rate would be ap­plied to is about 10 tril­lion yen of fi­nan­cial in­sti­tu­tions' re­serves held at the BoJ.

Re­flect­ing the con­fu­sion among traders about the un­prece­dented neg­a­tive-rate pol­icy, the one-month pre­mium for one-year in­ter­e­strate swaps have surged, ac­cord­ing to data.

"The swap­tion mar­ket is re­act­ing to the height­en­ing volatil­ity be­cause play­ers don't know where Li­bor will set­tle," said Naoya Oshikubo, a rates strate­gist at Bar­clays Plc in Tokyo. "One rea­son be­hind this is the fact that un­se­cured overnight call rates and gen­eral col­lat­eral repo rates aren't fall­ing as in­tended by the BoJ." Oshikubo said the overnight call rate could fall to as low as mi­nus 0.05 per­cent.

It will take at least an­other month un­til the mar­ket finds a level where many deal­ings are set­tled, as fi­nan­cial in­sti­tu­tions face un­cer­tainty over how the new pol­icy af­fects monthly fund flows, said Izuru Kato, the pres­i­dent of Totan Re­search Co. in Tokyo.

"Since past pat­terns don't ap­ply un­der the en­tirely new struc­ture, fi­nan­cial in­sti­tu­tions will take a con­ser­va­tive ap­proach un­til the fi­nanc­ing pic­ture is nailed down," Kato said. "If the fund­ing es­ti­mate proves wrong, banks might lose by pre­ma­turely lend­ing in neg­a­tive rates. Peo­ple are cau­tious and stay­ing on the side­lines."

BoJ board mem­ber Takahide Ki­uchi said on Thurs­day that adopt­ing the neg­a­tive-rate pol­icy might have in­creased mar­ket in­sta­bil­ity. Tenyear Ja­panese govern­ment bond yields plunged to a record low of mi­nus 0.075 per­cent on Fri­day, while 40-year JGB yield slid below 1 per­cent for the first time the day be­fore.

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