Hi Maurice, more clearing and clarifying magic is on the way ... and one piece of investment advice, "Buy shares in safe makers"
markets.scmp.com
Tuesday, August 6, 2002
Negative interest rates loom as Japan reneges on bank reforms
CATHY HOLCOMBE
Japanese savers sure are tenacious. The country with one of the highest savings rates in the world may now be facing a situation where people will have to pay banks to keep their deposits.
Will this be the last straw that pushes more Japanese savers to move their money out of yen deposits? If more money went abroad as a result, that would lighten the load on the yen, whose strengthening against the US dollar is snuffing out hopes of an export-led recovery.
Which makes some wonder if Japan's most recent cave-in on banking reform might have a silver lining - negative interest rates.
That is what Bank of America's Marshall Gittler concluded in a research piece Negative interest rates come to Japan. He believes the extension of an insurance scheme due to expire next April carries costs banks will most likely pass on to customers in the way of management fees. And since interest rates for most deposits are zero, the result is negative interest rates.
As a policy, negative interest rates are rarely employed. The example that stands out in most economists' memories is Switzerland, which in the 1970s charged fees on Swiss franc deposits held by foreigners in an attempt to lower the value of the currency, whose strength was threatening the economy.
Now Japan could be set to do the same thing, though it may not be policy so much as a side effect of a rewind on banking reform.
In April, Japan is due to put in the final phase of a long-running - and long-delayed - plan to eliminate full government guarantees for bank deposits. The rationale is that by lifting the blanket insurance, depositors will be forced to examine the asset quality of their banks. Thus banks will have a choice - clean up your balance sheets or expect a run on your money.
As with any plan involving pain, it came up against a lot of political opposition.
Originally it was set to be implemented last year, but was postponed twice before a "reform lite" version began last April in which the government limited time deposit insurance to 10 million yen (about HK$656,480) per person per institution.
By next April all deposits are due to face the same yen cap. But then last week Prime Minister Junichiro Koizumi said the government was looking into extending the insurance scheme to settlement accounts and, according to some speculation in the Japanese media, to demand deposits.
This time the government seems to be saying: "You can have the blanket coverage, but it's going to cost you." Which means even accounts that are not paying interest rates will face a fee. Which means negative interest rates.
The question is - will a certain percentage of depositors give up and move their money into a currency likely to bring greater returns? Would, for instance, more people join the already large number of Japanese investors who buy US Treasury bonds?
If so, there could be some positive economic effects, chiefly in taking some pressure off of the yen.
The problem is, past history shows Japanese hold on to their yen the same way people in the US hold on to their dollars and Hongkongese hold on to their Hong Kong dollars.
Then will it go into stocks? The costs will probably be too small to spark a riskier bet on stocks.
For that reason, it is likely Japanese investors will look to employ strategies for avoiding the fees rather than giving up their yen savings. That could involve switching accounts to banks that for one reason or another will decide to swallow the insurance costs themselves. Or they will simply stash it under their mattresses - one safe maker, Kumahira, reports orders have risen about 25 per cent in eight months.
So what does it all mean for investors?
That Japanese banks are safer?
No, just that weak banks have less reason to reform.
Sadly, the best investors can do to act on the possibility of having to face negative interest rates is: Buy shares in safe makers. |
