Japan’s money markets gird for end of negative rates in March
Investors assume banks will rush to dump short-dated paper and keep excess cash at the Bank of Japan
Speculators beting on a historic monetary policy shit in Japan expect money markets will be upended by potential new deposit rules and are crowding into bets against short-dated bonds.
Yields on one-year Japanese treasury bills, which went sideways through 2023, are up a relatively sharp eight basis points in 2024 to a near almost decade high of 0.067 per cent, under pressure from short-sellers. Six-month yields, negative for eight years, leapt above zero last week.
The positioning is a bet that the Bank of Japan overhauls a tiered deposit programme that charges financial institutions a discouraging -0.1 per cent rate on excess reserves, and replaces it with a positive overnight rate. Investors assume banks will rush to dump shortdated paper and keep excess cash at the BOJ.
“The demand/supply situation on the shortend JGB (would) dramatically change,” said Keita Matsumoto, head of financial institution sales and solutions at Citigroup Global Markets Japan. Under its yield curve control (YCC) policy, the BOJ guides short-term interest rates around -0.1 per cent and has gradually eased its grip on the 10-year bond yield with a current sot cap at 1 per cent.
While investors have for months speculated the BOJ will tighten policy, this time they expect it will lit overnight rates to zero or just above zero, rather than changing setings for longer term yields.
The BOJ’S negative rate framework penalises financial firms for parking excess reserves with the central bank. Their balances are split into three tiers, with required reserves earning 0.1 per cent and excess balances geting zero interest or a negative 0.1 per cent.
Total reserve balances at the BOJ were roughly 536.75 trillion yen ($3.63 trillion) in January.
Some of the fiercest bets on money flowing from shorter money market debt into these reserve accounts are in the rates futures market.
Futures contracts pegged to the BOJ’S overnight call rate TONA maturing in June were last quoted at 100.01, implying the overnight call rate will be almost at zero. Those maturing in September next year indicate the overnight call would be much higher at 0.0575 per cent.
The call rate was quoted at -0.011 per cent on Thursday.
“The obvious difference in the way the market hedges for rising rates is that now their focus is on the timing of the end of the negative rates,” said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.
The one-month interest rate swap has also turned positive in the past week, rising as high as 0.04 per cent.
“The three-month futures prices have already priced in investors’ bet that the BOJ will end its negative rate soon,” said Izuru Kato, chief economist at Totan Research.
Over the past eight months, investors have locked horns with the BOJ, frequently shorting benchmark 10-year bonds to push yields above the cap and forcing the central bank to hike borrowing costs on those bonds to deter short-selling.
Upon ending negative rates, the BOJ is also likely to ditch YCC and set the overnight call rate as its new policy target, Reuters reported this week.
The two-year JGB yield, which is highly sensitive to short-term rates, hit a 13-year high earlier this week, but the 10-year JGB yield is some distance from its 1 per cent cap. The BOJ is commited to intervene if the yield exceeds that level.
Bank of Japan Governor Kazuo Ueda will likely take his time normalising ultra-loose monetary policy ater ending negative interest rates, former central bank executive Hideo Hayakawa said on Thursday. During his fiveyear stint as BOJ board member until 2005, Ueda played a key role in the central bank’s introduction of forward guidance that pledged to keep interest rates at zero “until deflationary concerns are dispelled.”
Such experience suggests Ueda, a former academic, will change the BOJ’S current framework into an orthodox one combining a short-term interest rate target with guidance on the future monetary policy path, Hayakawa said at a seminar.
The BOJ will likely end negative interest rates this spring but take a wait-and-see approach thereater to check whether inflation-adjusted real wages turn positive, said Hayakawa, the central bank’s former top economist.
“Given Ueda’s very cautious character and his focus on building consensus within the board, he will likely take plenty of time and proceed carefully in normalising policy,” he said.
In an effort to reflate growth and sustainably achieve its 2 per cent inflation target, the BOJ currently guides short-term rates at -0.1% and caps the 10-year bond yield around zero. It also buys risky assets such as exchangetraded funds (ETF).