ANALYSIS-Bank of Japan’s tricky balancing act squeezes Tokyo money market

- Advertisement -

* BOJ’s regional bank reward scheme drives up market rates

- Advertisement -

* Huge costs force BOJ to review rules in unprecedented move

- Advertisement -

* BOJ struggles to cap rates without hurting lenders much

TOKYO, Nov 17 (Businesshala) – A Bank of Japan scheme launched to support small lenders hurt by its ultra-low interest rates has disproportionately raised short-term borrowing costs, causing the central bank’s plans to eventually Has made easy monetary policy more complicated.

- Advertisement -

Years of ultra-low rates have squeezed regional lenders’ profits and stoked fears of a banking crisis, forcing the BoJ to launch a program in March that would reduce deposits held by regional banks. Pays 0.1% interest which consolidates or deducts the cost.

This prompted smaller banks to aggressively tap money from the money market to move them into BOJ accounts, in defiance of the central bank’s policy to guide short-term rates around -0.1% to lower the benchmark rate to 0%. pushed closer.

In an unprecedented move, the BOJ on Tuesday decided to change the rules of the bounty scheme, just eight months after it went into effect.

While the response partly addresses immediate concerns over rising rates, it also shows how the BOJ’s complex policy framework has become a cumbersome balancing act.

“The BoJ has introduced several schemes in recent years in contrast to its negative rate policy, which penalizes banks for holding cash,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

“As a result, the core of the BoJ’s monetary policy appears to be shaky. The central bank will have to decide what it is going to prioritize.”

The average overnight call rate – Japan’s key money market rate – hit -0.006% on September 9, its closest to positive territory since 2016.

It closed again last month, when it hit -0.008%. The balance outstanding regional banks borrowed from the non-collateralized call market crossed 11 trillion yen ($97 billion) by the end of October, nearly double the January level.

While the immediate impact on the economy is small, growth above 0% would cast doubt on the BoJ’s control of rates and the credibility of its yield curve control (YCC) policy.

“If the overnight call rate turns positive, it would contradict the BoJ’s policy,” a fund manager at a regional bank said on the condition of anonymity.

Some BOJ policymakers have expressed concern.

“We need to look carefully to see if there is no disruption to market operations,” a board member said at a policy meeting in September, according to a minute of discussion.

The BOJ’s move on Tuesday to limit payments to regional lenders using its relief plan underscores how the Fragile Balance Act aims to meet two of the central bank’s goals – without hurting the bank’s profits. Forcefully capping rates – is faltering.

While the BoJ took steps to make the YCC sustainable in March, the recent unexpected hike in short-term rates also raises questions about whether the policy may consider the same rate hike as other central banks.

“By subsidizing regional banks, the BOJ is effectively ending its unpopular negative rate policy,” said Takahide Kiuchi, a former BOJ board member.

“It would be much easier if the BoJ left negative rates. But it may not be because doing so could lead to an unwanted increase in the yen.”

For now, money market rates have stabilized as banks heed the warnings of BOJ officials to avoid tapping money market funds at positive rates.

But there is uncertainty over how long the peace will last.

Another regional bank fund manager said, “No bank would dare to challenge the BoJ by tapping funds at positive rates”, although doing so makes economic sense. “But if for some reason the call rate turns positive, that may change.”

($1 = 114.8800 yen)

Reporting by Leika Kihara and Takahiko Wada, Additional reporting by Daniel Leussink; Editing by Sam Holmes


- Advertisement -

Stay on top - Get the daily news in your inbox

DMCA / Correction Notice

Recent Articles

Related Stories

Stay on top - Get the daily news in your inbox