Tokyo exchange to get ready for negative rates
By Hideyuki Sano
TOKYO, Aug 29 (Reuters) - One of Japan's financial exchanges has said it will make its system capable of trades in negative interest rates, one of the more bizarre developments from the Bank of Japan's unusual experiment with free money.
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Most traders think that in practical terms, minus interest rates, which allows borrowers to pay back less than they borrowed, are highly unlikely.
``I don't think interest rates will ever become minus,'' said a dealer at a major Japanese bank.
But the Tokyo International Financial Futures Exchange (TIFFE), has to be ready to cope with the slim chances that rates might one day fall below zero.
``We decided to deal with minus interest rates to activate trading,'' a spokesman for the exchange said.
The flood of free money has come as Japan's central bank has tried one novel approach after another to kick-start an economy mired in gloom for more than a decade.
MARKET DRYING UP
The business of the exchange had been severely hit after the BOJ started to effectively guide short-term interest rates near zero since late March because when money is free, there is no point trading it.
Trade volume of euroyen three-month interest rate futures, the exchange's flagship instrument, has dropped significantly since then.
The average daily volume for benchmark euroyen futures has trickled to less than 10,000 contracts, compared with 20,000 to 50,000 before the BOJ's easing in March.
Money traders often joke they would make money working part-time in a fast-food chain than sitting in a dealing rooms these days.
The exchange, hoping its new measures will bring in some trade flows, says interest rates could fall below zero.
Indeed, Switzerland has experienced a de facto negative interest rates in the 1970s, when money market interest rates were brought down to zero, by imposing penalties on foreign investors' deposits of Swiss francs.
The Switzerland introduced such measures to curb Swiss franc strength but analysts doubt if Japan could take such measures.
The yen is already weak, having lost about 15 percent of the value both against the dollar and the euro during the past 12 months.
Japan is concerned that too weak a yen will antagonise trading partners in Asia when their own economies are being hit by the global slowdown.
PAST RECORDS
A form of negative interest rates emerged in late 1998, when Japan was mired in financial crisis after a string of bank failures.
At that time, Japanese banks had to pay a huge premium, the so-called ``Japan Premium'' to borrow dollars, which in turn enabled some prime foreign banks to borrow yen at negative interest rates through currency swaps.
The Japan premium disappeared after the government injected capital to ailing banks, although Japan's financial system remains fragile.
And even if Japan Premium emerges again, that does not mean that futures contracts could be priced at negative yields, dealers said.
But even at the height of financial crisis, when some prime banks did quote a negative rate several times, the benchmark London interbank offered rate has never fallen below zero.
On the other hand, some economists even say the central bank could theoretically guide interest rates below zero, because holding cash at hand is not totally risk-free as it could be stolen or lost. |
