Yen Deposit Rates Drop Below Zero
fears of interbank default
Leading western banks have cut their yen deposit rates to below zero in the last few days in the strongest indication so far of growing anxiety about the solvency of their Japanese counterparts.
The three-month London Interbank Offered Rate - the rate at which banks lend to each other - remained positive for Japanese yen yesterday at 39 basis points (0.39 percentage points), although this was the lowest level yet recorded.
However, some banks, such as JP Morgan and Barclays Capital would only accept yen deposits at negative nominal rates of interest.
Bankers said that this reflected the fact that depositors, including other Japanese banks, were unwilling to place their money with Japanese banks owing to fears about their declining creditworthiness.
Depositors were willing to accept the sub-zero interest rates on offer owing to the lack of other destinations for their yen assets.
All the alternatives - the Japanese stock market, Japanese government bonds or deposits with Japanese banks - were either too low-yielding or too risky, said bankers.
At the same time, western banks have little demand for yen assets and are consequently offering punitively low and even negative rates. "The fact that people are willing to accept negative interest rates in yen is an alarming reflection on the state of the Japanese economy," said a banker in London.
The swing is thought to represent one of the first times that any international market has recorded negative interest rates in recent history.
According to the British Bankers Association, which calculates Libor on a daily basis, Barclays Capital has offered rates of minus 3 basis points for two to three month lending this week, while JP Morgan has offered rates as low as minus six basis points on yen deposits.
Traders report that these "open" rates may be overstating the situation, since even lower rates have been privately agreed between some Japanese and European banks in recent days.
The slump in yen deposit rates also reflects the growing problems faced by Japanese banks and companies in raising dollars in overseas markets, ahead of the end of the calendar year.
In particular, some Japanese banks are now so desperate to raise dollar funds that they are agreeing to swap yen for dollars at increasingly disadvantageous rates.
The Financial Times, Nov. 6, 1998 |
