Zen Banking: Some Interest Rates in Japan Drop Below Zero - NYTimes
By SHERYL WuDUNN -- 11/7/98
TOKYO -- Japanese interest rates were already the
lowest on record, so it had seemed impossible that
they
could go any lower. But they have: some interest rates
are now dancing into negative territory.
This week, investors have bought short-term Japanese
Government bills that have negative yields. In other
words, they are paying more money than they can expect
to earn when the bills mature in six months, in effect
paying simply for the privilege of holding bonds.
Likewise, a few foreign banks are paying interest,
instead of earning interest, for clients to borrow
their money.
In some countries, bank depositors have occasionally
earned negative real interest rates, meaning that their
yields were less than the inflation rate. But this is
much more rare: the nominal interest rate is negative.
"We've basically never seen this before," said William
D. Campbell, a strategist with J. P. Morgan in Tokyo.
The slide below zero shows how some investors have
become so downbeat about the Japanese economy that they
are willing to invest only in Government bonds, the
safest bets in the country. It also means that there
are so many yen around that some banks, mostly foreign
banks, are willing to pay someone to take them off
their hands for a time.
Why would anyone pay someone else to take his money?
Why not just keep it?
Partly for convenience.
A bank could keep the yen but that could lead to extra
expenses.
So long as the interest rate is only slightly negative,
it may prefer to buy bills even if there is a slight
cost. A bank could keep its yen at the Bank of Japan,
but with so much cash, there are transportation costs.
There is also a larger issue.
"It's symptomatic of radical pessimism of the economy,"
said Jeffrey D. Young, an economist with Salomon Smith
Barney in Tokyo.
The rush to Treasury bills is virtually an escape from
Japanese banks, analysts say. With the economy in
recession and piles of bad loans eroding the capital
bases of the banks, some of Japan's weakest financial
institutions are caught in the struggle for their
corporate lives. Such is the distrust of Japanese banks
that investors may prefer to pay for the right to put
their money in Government Treasury bills for a few
months instead. At least, the feeling seems to be, then
it will be safe. Indeed, the same flight to quality
drove down yields on United States Treasury bills to
virtually zero in the Depression.
Still, while Treasury yields typically serve as
benchmarks for lending rates, the negative yields in
Japan have not yet led consumer and corporate rates
below zero.
Also this week, a few foreign banks, like Barclays
Capital, J. P. Morgan and Citibank have announced
negative interest rates on lending yen to other banks.
Barclays Capital advised other banks that if they
wanted to borrow yen, they would be charged the
equivalent of an annual interest rate of minus 0.03
percent. That means that Barclays would pay the
borrowers to borrow, and so for every million yen
borrowed, the client would over a year's time receive
300 yen.
A spokeswoman at Barclays Capital, the investment arm
of Barclays Bank, said, "We have traded at that rate
quite frequently." She added that transactions were
also recorded at negative 0.08 percent as well.
J. P. Morgan also offered rates as low as negative
0.0625 percent, but the bank declined to say how many
transactions were concluded at such negative interest
rates.
Richard A. Mahony, spokesman for J. P. Morgan in
London, said that in the current market environment,
Morgan could still finance itself with yen so cheaply
that it could "profit by lending at zero or even
slightly negative rates."
Indeed, the reason that foreign banks have such cheap
access to yen currency is because of the troubles in
the Japanese economy. Japanese banks have an acute
demand for dollars to help finance their overseas
operations, but American banks are hesitant to lend
dollars to them because of heightening concern over the
Japanese financial system.
The "Japan premium," the higher costs that Japanese
banks have to pay for dollars, compared with the rates
that American banks pay, has risen sharply.
For months, American banks have been trimming their
dollar lending to Japanese institutions, and in the
increasingly uncertain outlook for the global economy,
American institutions have been trying to shed, rather
than increase, their risk.
Particularly as the year-end nears, American banks are
skittish about having their balance sheets reflect a
great deal of exposure to Japanese banks.
So instead of lending dollars, American institutions
are using swaps to turn over dollars to Japanese banks
in exchange for yen.
Recently, the Japanese demand for swapping yen for
dollars has become so intense that American banks have
been swapping huge quantities, leaving them sitting on
piles of extremely cheap yen.
As a result, many foreigners are sinking their yen into
safe six-month Japanese Government bills. And the
reason the banks can accept negative returns on the
Treasury bill is that when they obtain yen from
Japanese banks, they are being paid enough to hold it
so that they can profit by lending it to the Government
at the barely negative rates they receive on the bills.
All this puts the Bank of Japan in a bit of a quandary.
It has been trying to stimulate the economy and get
more money flowing through the economy to alleviate a
credit crunch that is crippling companies.
Instead, foreign banks are ending up with much of the
yen, and the Bank of Japan may need to inject dollars
into the market in a pinch if foreign banks refuse to
supply the dollars.
"I think the Bank of Japan is very worried about this,"
said Xinyi Lu, chief strategist at Paribas Capital
Markets Ltd.
in Tokyo.
On Thursday, when the Government auctioned off Treasury
bills worth $13.6 billion, foreign banks were falling
over each other to buy the Government's six-month bills
so that the cost to the Government was only 0.03
percent.
But there was such an appetite in the Japanese Treasury
market that in the day's trading prices surged, driving
the yield on certain six-month bills into negative
territory for the first time. (Bond yields and their
prices move in opposite directions.) In other words,
investors were so eager to buy the bonds that they were
willing to take slightly negative returns of 0.005
percent.
For the moment, then, the Government is virtually
receiving free money. But it is not helping the economy
very much.
"It's like saying, while you have cancer, 'Don't eat as
much,' " Campbell said. "You're just saving on
groceries.' "
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