Japan currency markets were disappointed, for some reason, last month when the BOJ failed to make any changes at their Monetary Policy meeting on April 29, causing the yen to appreciate by 5% over 4 days. Rumours had flowed during the week prior to the policy meeting, fanned partly by the Nikkei (4.19.16), that the BOJ was starting to build a consensus to follow the ECB further down it’s negative interest rate path, including negative rate lending. All of which was premature!
On March 10, 2016 the ECB had reduced its 3 key benchmark rates (deposit rate from -0.3% to -0.4%, MRO (or ‘refi’ rate) from 0.05% to 0% and marginal lending facility from 0.3% to 0.25%). The ECB also increased monthly bond purchases from €60bn to €80bn with €20bn/month non-bank euro-denominated investment grade corporate debt. (The APP (asset purchase program) will run at least until March, 2017). To further encourage lending, the ECB launched new series of 4 new TLTRO 2 (targeted long-term refinancing operations) from June 2016 (4 yr. maturity), in which banks provide collateral to the ECB in exchange for 4-yr loans. Counter-parties are eligible to borrow up to 30% of the stock of eligible loans at MRO rate, which was reduced to 0, with increasing discounts up to the deposit rate (-0.4%) for banks that exceed benchmarks, so it is expected that banks will switch from TLTRO 1 to TLTRO 2 financing (helping banks with upcoming funding needs). The first four TLTRO programs saw a 384.4bn euro take up by European banks between June, 2014 and June, 2015 contributing to the strong growth in consumer credit over the last year.
NB: ECB Credit Impulse is Consumer credit growth minus real GDP growth
The LTRO and TLTRO loans to banks have been quite successful in boosting lending, though the initial take-up in 2011-12 was largely redeposited back at the ECB and not invested in buying sovereign debt as might have been hoped. Stiff collateral requirements and 1% interest on the loans meant that most of the money was returned after 1 year when banks’ own financing situation had improved. The ECB Governing Council’s decision this time to not implement a ‘tiering system’ on rates was highly significant in that it signaled that there is a limit as to how low rates can go.
Thus with deposit rates at -0.40% and lending rates at 0, European banks are incentivized to increase lending rather than deposit excess reserves at the ECB, while being rewarded with negative borrowing rates when exceeding ECB lending quotas.
What about Japan? It would seem that the BOJ’s tier-system on deposit rates whereby ¥220trn in bank (Basic Balance) deposits at the BOJ still enjoy 10bps interest and only ¥10-¥30trn in excess (Policy Rate Balance) deposits requiring 10bps interest paid by the banks, is only marginal at best, in encouraging banks to increase lending rather than pay a penal rate on excess deposits. Further, as of March, the BOJ’s special loan support program, which also has stiff collateral requirements, had reached ¥24.42trn with lending rates to the banks coming down to 0 in March (with the remainder repriced every quarter over the next year).
So while the BOJ seems to be following the ECB’s line, it is clear that a corridor of 30-40bps between reserve deposit rates and BOJ lending rates is necessary for incentives to work effectively. Since banks can easily fund from their own deposits, one would expect that deposit reserve rates on a ‘majority’ of excess reserves at the BOJ would have to be -30bps before such measures as negative ‘lending support loans’ were adopted. Further, with only one month of data since negative deposit rates came into effect February 16, it would have been premature to further reduce deposit rates without knowing their efficacy. The BOJ may also be reluctant to act before the Brexit referendum on June 23, making a move by the bank unlikely at their June 16 meeting as well. Mr. Kuroda may also be hoping to wait for his new board member from Shinsei Bank to come on board in June to avoid the narrow 5-4 margin that he enjoyed when the BOJ Adopted negative reserve deposit rates at their January meeting.
Since the BOJ’s decision to adopt negative rates, it has come under fire from the city banks, in particular, for fanning unease among depositors without a commensurate increase in lending. This blame seems premature and also possibly emanates for city banks’ frustration at the Abe’s unwillingness to give them a seat on the board in June to replace outgoing member Ishida who hails from SMBC, the first time that the city banks have not been represented on the policy board.
It would seem appropriate, however, that the BOJ examine why TIBOR rates have not come down more, whereas Yen Libor (London), Eonia rates and US Libor are all within 7-8bps of deposit or policy rates. Japan TIBOR rates still suggest that banks would rather pay the 10bps on excess deposits (since they receive 10bps on 10-times that amount), rather than reduce TIBOR rates into negative territory.
Figure 1: Tibor vs JPY LIBOR
Figure 2: ECB Deposit Rate vs EONIA
Figure 3: USD Libor vs Federal Funds Effective Rate