BOJ to debate exempting $90 billion in short-term funds from negative rates



The Bank of Japan’s policy board is set to discuss this week whether to exempt $90 billion in short-term funds from its newly imposed negative interest rate, people familiar with the matter said, after the securities industry warned that investment money would be driven into bank deposits.

Some in the BOJ are sympathetic to the request, which came from the Investment Trusts Association, the sources said, because a flow from investment to bank accounts will go against a push by Prime Minister Shinzo Abe and the central bank to move more of Japan’s immense savings out of deposits and government bonds and into more productive investments, to kick-start growth and defeat stubborn deflation.

But other central bankers worry that granting an exemption from negative rates for “money reserve funds” (MRFs) — a low-risk product brokerages offer investors to temporarily park their cash — could create a troublesome precedent as the financial industry seeks to shield other investments from negative rates, the people say.

“MRFs play an important role in fund settlement,” said one of the sources.

Another said: “I think it’s only natural (for the BOJ board) to debate it (at the policy meeting on Monday and Tuesday).”

But another of the sources said: “This is a touchy issue … It raises the question of whether (allowing an exemption) could lead to similar requests by banks.”

A BOJ spokesman said he could not comment, citing a news blackout before the policy meeting.

The debate highlights the difficulties facing the BOJ after its Jan. 29 decision to push a key policy rate below zero for the first time by imposing a 0.1 percent charge on some of the excess reserves financial institutions invest with the BOJ.

The decision, meant to spur lending and put to work more of Japan’s ¥1.6 quadrillion ($14 trillion) in personal financial assets, instead prompted a sharp rise in the yen, steep falls in shares and caused many individuals to hoard cash.

The board has instructed the BOJ’s staff to discuss the feasibility of making MRFs an exception, sources say.

“We expect a heavy flow of funds seeking to avoid negative interest rates … into bank deposits under the current conditions,” Deutsche Bank analysts Masao Muraki and Hiroshi Torii said in a recent note to clients.

“Banks could ultimately place restrictions on large corporate deposits and money trusts.”

The securities industry shows no sign of panic about outflows but has made clear it wants an exemption, given the potential drying-up of funds.

“We would like to ask (the BOJ) to respond, giving full consideration to the nature of MRFs” in funds settlement, Yoshio Okubo, vice chairman of the trusts association, told a news conference Friday.

MRFs totaled ¥10.07 trillion ($88.5 billion) at the end of February, the trusts association says, or 11 percent of Japan’s investment trusts.

The Financial Services Agency, the industry’s main regulator, last month suspended a requirement on MRFs that had threatened to make them post losses as a result of the BOJ’s negative-rate policy, a source said at the time.

The funds have no explicit guarantee to protect the principal of investments, but the industry would be loath to make investors suffer losses for fear of major outflows on what are viewed as safe investments.

So the FSA agreed to temporarily waive the requirement that MRFs put most of their investment funds in securities such as bonds and commercial paper, this source said.

Market interest rates have gone negative as far out as the 10-year bond yield.