Japan’s COVID payments strain lenders, reveal flaws in BOJ policy

A man wearing a protective mask stands outside the Bank of Japan headquarters amid the coronavirus disease (COVID-19) outbreak in Tokyo, Japan, May 22, 2020.REUTERS/Kim Kyung-Hoon

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  • MUFG applied negative rates, 1st time since 2016
  • Episode highlights growing tension among Japanese lenders
  • MUFG case comes as BOJ faces speculation over policy change

TOKYO, Feb 9 (Reuters) – A surge in deposits caused by the government’s huge cash payments is straining some Japanese lenders, complicating the central bank’s efforts to ease the side effects of its negative interest rate policy .

Industry leader MUFG Bank (MTFGTU.UL) was imposed negative rates last month on deposits with the Bank of Japan – the first time since the policy was adopted in 2016. read more

This was an unintended consequence of a steady increase in deposits, as households and businesses saved some of the payments they received from the government to deal with the hit of the pandemic.

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The deposit balance at major banks, including MUFG, reached 446 trillion yen ($3.87 trillion) in January, up 14% from pre-pandemic levels at the start of 2020.

Deposits could rise further as the government plans to spend another 2 trillion yen on cash payments to households with children.

The MUFG case underscores how years of efforts by mega-banks to avoid paying interest, for example by moving money from BOJ reserves to investments and loans, can reach a limit.

“The amount of deposits has exceeded a certain threshold. There are also limits to managing funds in the money market in an economically sensible way,” MUFG told Reuters in a written response, when asked. why he decided to keep so many funds in BOJ reserves. at the risk of being charged 0.1% interest.

As part of efforts to keep borrowing costs low and incentivize lenders to lend money rather than sit on piles of cash, the BOJ is charging 0.1% interest on a portion excess reserves that financial institutions keep with the central bank.

The BOJ has taken steps to limit the size of reserves for which the charge applies to mitigate the damage ultra-low rates are inflicting on banks’ profits.

Indeed, the charge only applied to about 300 billion yen of MUFG’s reserves over a month-long period up to January 15, a drop in the bucket considering the combined deposits of the mega -banks at the BOJ worth about 186 trillion yen.

The BOJ also compensates the big banks with a 0.1% interest reward for a separate layer of reserves. The total sum that the banks receive annually is estimated at around 950 billion yen.

“I don’t see this as a sign that the potential demerit of our negative rates policy is materializing,” BOJ Deputy Governor Masazumi Wakatabe said last week, contradicting the view that the MUFG case has set. highlight the downsides of a massive stimulus.

But the episode comes at a delicate time for the BOJ, which is struggling to rein in market speculation about a near-term policy adjustment as other central banks consider an exit from ultra-low rates.

“Financial institutions are still angry at the BOJ’s negative rate policy,” said a source with direct knowledge of the BOJ’s dealings with private lenders. “Also, they want a steeper yield curve that would widen their margin.”

($1 = 115.3600 yen)

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Reporting by Takahiko Wada and Leika Kihara, additional reporting by Makiko Yamazaki; Editing by Sam Holmes

Our standards: The Thomson Reuters Trust Principles.

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