EUROPE & ASIA: Japan's interest rates fall below zero

Financial Times/FT.com ^ | Jan 25, 2003 | Mariko Sanchanta and Christopher Swann

[arete]

Japanese interest rates have fallen below zero for the first time in the country's history.

The overnight call rate on Y15bn (£79m, $123m, €113.6m) of funds traded between foreign banks fell to minus 0.01 per cent. The lender was Dutch bank ABN Amro and the borrowers were French bank Société Générale and BNP Paribas, according to marketsources.

The negative ratemeans that Société Générale and BNP are, in effect, being paid to borrow funds as they find themselves in the fortunate situation of having to pay back less than they were lent.

ABN Amro could also potentially profit from the deal as some foreign banks are able to obtain funds at a negative rate.

Fears over the solvency of Japanese banks have led many Japanese citizens to prefer depositing funds in large overseas banks. As a result, foreign banks have been able to charge customers to take deposits.

Banks are obliged to lend surplus funds or deposit them with the Bank of Japan. Recently the Bank of Japan has been limiting the deposits it will take, thus forcing foreign banks to lend - even if they have to do so at negative rates.

With long-term interest rates already virtually nil, under the Bank of Japan's, "quantitative easing" policy, bankers said yesterday's record move into negative territory was more symbolic of the country's decade-long economic malaise rather than an indicator of future financial chaos.

"It cannot be ruled out that this will become a more common phenomenon," said one senior Japanese banker.

Negative interest rates could potentially boost revenues at foreign investment banks, where investment returns have festered because of a dearth of attractive investment opportunities.

"Because of the BoJ's quantitative easing policy where interest rates are zero, we don't have any earnings opportunities through the domestic market," said one vice-president at foreign investment bank in Tokyo. "If we can borrow money at a negative rate, we can profit from the deal."

Critics say that the BoJ's policy of keeping interest rates at virtually zero and flooding the money market with liquidity has largely been ineffective in stimulating the economy, which is set to contract in the fourth quarter, according to economists.

"The BoJ has to buy more Japanese government bonds (JGBs) or foreign bonds to affect the market," said Hisashi Sitow, director at Credit Suisse First Boston in Tokyo. "Monetary policy is clearly ineffective, as base money is increasing but growth in the money supply is stagnant."

Current record-low yields on JGBs indicate that investors are not betting on a near-term economic rebound amid nearly four years of falling prices. The 10-year JGB has been skirting new four-year lows almost every week, while the yield on the five-year hit a record low yesterday.

"This is all part and parcel of a growing loss of faith in Japan's future," said Marshall Gittler, strategist at Deutsche Bank in Tokyo. "JGB movements are telling a story that deflation is set to continue indefin-itely."

[arete]

This is all part and parcel of a growing loss of faith in Japan's future," said Marshall Gittler, strategist at Deutsche Bank in Tokyo. "JGB movements are telling a story that deflation is set to continue indefin-itely."

Hey how about that. They pay you to borrow money and you pay them to save it. Looks alot like where we're heading real soon.

Richard W.

[arete]

FYI

Comments and opinions welcome.

Richard W.

[DeaconBenjamin]

I haven't seen any threads discussing gold popping over $370. Any thoughts?

[Eternal_Bear]

I want to borrow a few billion dollars if that's the case.

[yooper]

Sounds to me like it's almost time to buy....

[arete]

I keep expecting it to pull back $20 or $30 but instead, it keeps going up. I'm not sure what to make of it. We may be seeing the big short positions finally getting squeezed and being forced to cover. Also heard some talk recently that the big money wealthier investors were showing more interest in PM's but of course, there are so many rumors flying that nothing can really be trusted.

It ought to be interesting to watch though cause some of the big shorts are going to be busted and that will show up later in other places.

Richard W.

[Cicero]

If gold doesn't pull back this coming week, it will probably just keep going up. The last week in January often sees a dip, but February is usually strong.

It's been so long since the last bull market in gold that most people still don't believe it.

[SerfsUp]

It ought to be interesting to watch though cause some of the big shorts are going to be busted and that will show up later in other places.

You mention "other places" and I know JPM is heavily involved in gold. As bad as this malaise is, I wouldn't expect to see it end until we see some major bank failures. It's also a good idea to keep an eye on the GSE's for signs of bad loans.

[arete]

It's been so long since the last bull market in gold that most people still don't believe it.

Yes, that is true.

Richard W.

[DeaconBenjamin]

I don't know who's playing tonight/this morning, but kitco is showing jumps upward (and downward) as much as $.90 in a minute. There's a real tug of war going on right now. (Maybe Raiders fans are selling to cover their losses, and Bucs fans are buying with their winnings?)

[Husker24]

So lets get this straight, I could borrow 1,000,000 and only have to pay back 900,000?

[AdamSelene235]

It's also a good idea to keep an eye on the GSE's for signs of bad loans.

My brother ! A great and humiliating chastisement awaits the GSEs.

[arete]

You mention "other places" and I know JPM is heavily involved in gold.

JPM is exposed to so many things that could blow-up on them that it isn't even funny. I can't see JPM ever being allowed to fail though. They do all of Wall Streets and the Fed's dirty work so I think that Greenspan would just literally hand them money if necessary.

Richard W.

[arete]

I could borrow 1,000,000 and only have to pay back 900,000?

That's how it would appear. Deflation is a strange creature.

Richard W.

[templar]

I keep expecting it to pull back $20 or $30 but instead, it keeps going up.

I've heard it being attributed to the Chinese being allowed to own gold again among other things. Wonder if all the chinese who have enough extra cash to buy a few ounces go out and buy it, what would the effect on world available supplies be?

[WoofDog123]

"I keep expecting it to pull back $20 or $30 but instead, it keeps going up. I'm not sure what to make of it. We may be seeing the big short positions finally getting squeezed and being forced to cover. Also heard some talk recently that the big money wealthier investors were showing more interest in PM's but of course, there are so many rumors flying that nothing can really be trusted."

I wonder what % of the large short positions are hedged against the dollar, which is a big part of the reason gold is up as much as it is. Gold against most major currencies is only up something like 10% in the last year i think...

[arete]

what would the effect on world available supplies be?

The answer to that should be obvious.

Richard W.

[arete]

I wonder what % of the large short positions are hedged against the dollar, which is a big part of the reason gold is up as much as it is.

My eyes glaze over when I start listening to people talk about currency translations and various hedging techniques. Like fractional reserve banking, for every real dollars worth of physical gold there is probably 10 to 100 times that much represented in "paper gold" being traded. That is a big part of the problem. When and ounce of the physical increased in value by say a dollar, that increase could be multiplided many times in the paper markets especially if traders are using leverage.

Richard W.

[jwh_Denver]

I keep expecting it to pull back $20 or $30 but instead, it keeps going up.

The Chinese and Arabs are buying big time along with a few other countries on a smaller scale. India being in between.

The last time I bought into PM's it was just before Christmas when I noticed the price of gold go up in these countries and then NY would try to trouce it. That was the reason I bought. So far a %7 gain and PM stocks have been lagging behind the price of gold. I expect some sort of pullback because the people buying big quantities have to realize that NY is full of idiots and will take gold down and essentially give it away at a discount. The big if in this that I expect somebody wanting their big futures
contract delivered and the CB or whoever can't deliver. Whammo. How high do you think gold will jump then? (rhetorical question).

[arete]

The big if in this that I expect somebody wanting their big futures contract delivered and the CB or whoever can't deliver. Whammo. How high do you think gold will jump then?

It has already happened. When Buffett was buying large quantities of silver, his orders could not be filled. I understand that he was given some sort of financial compersation not to push the issue at the time. Also, the gold miner, GG, placed an order for a large quantity of gold that couldn't be delivered. That was a somewhat publicized "test" of the market conditions.

Anyway, not that much real gold and silver are in inventory. It has become a paper market so when someone actually demands delivery, it can cause problems.

Richard W.