Negative on Negative Rates

January 31st, 2016 9:37 am | by John Jansen |

Via Bloomberg:

Japan has a new plan to get its banks to lend more: Tax them for being too conservative with their cash.

Perhaps that sounds good in theory. Bank of Japan Governor Haruhiko Kuroda certainly seemed to think he’d give a jolt to the nation’s lackluster markets this week by announcing negative interest rates on some bank deposits for the first time in years.

Kuroda’s statement did give some immediate steam to the debt and currency markets. It sent yields on Japanese 10-year government debt tumbling to an all-time low of 0.1 percent and pushed benchmark rates around the world even lower. The yen dropped the most in more than a year against both the dollar and the yuan.

When it comes to bank lending, however, the central bank’s announcement will probably have more of a dampening effect than a stimulative one. Shares of Mitsubishi UFJ Financial Group and Mizuho fell in the wake of Kuroda’s announcement.

Here’s why: The lower rates go, the more banks struggle to generate revenue both from trading and lending, making it less attractive for them to extend credit to companies. This is especially the case at a time of mounting financial regulations aimed at reducing risk on bank balance sheets. If firms make loans with long maturities, they’re subject to all sorts of duration risk that may prove highly risky. If they keep to shortish-term loans, they earn a tiny amount relative to the cost of reserves they may have to hold on their books.

“I’m not sure that you spark more lending by making banking inherently less profitable,” said Jim Vogel, an interest-rate strategist at FTN Financial. “That’s not an inherent path to a healthier financial system.”

Just take a look at what’s happening in Europe, where central bankers brought benchmark deposit rates below zero for the first time in June 2014.

Yes, investors have plowed more cash into riskier, euro-denominated securities. But the banks themselves are lending less and exiting businesses that have historically been crucial to the functioning of fixed-income markets.

In October, for example, Credit Suisse decided to drop its role as a primary dealer across Europe as it saw less potential economic gain from that business. Societe Generale resigned as a primary dealer for the U.K. gilt market, the French bank said Friday. Meanwhile, Deutsche Bank reported disappointing earnings this week, in large part because of a drop in debt-trading revenue.

So Japan certainly surprised the market with its move, perhaps as an inadvertent concession that it had few other tools left to ignite its decades-long economic slump. But it’s unlikely that the move will actually spur a new rush of bank lending.

The nation will have to come up with something else in short order to keep the adrenaline of surprise and hope alive in markets.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at


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