Business / Corporate

Japan's biggest bank may cease underwriting JGB auctions as negative rates bite

Bloomberg

The main lending unit of Japan’s biggest bank may quit as one of the 22 primary dealers that underwrite government bond auctions, potentially becoming the first major financial firm to withdraw since the Bank of Japan introduced negative interest rates this year.

Bank of Tokyo-Mitsubishi UFJ Ltd. is considering the move and nothing has been decided, spokesman Kazunobu Takahara said Wednesday. A Finance Ministry spokesman was not immediately available for comment.

The lender would continue to participate in auctions and purchase Japanese government bonds as needed, people with knowledge of the matter said, asking not to be identified as the deliberations are confidential.

Mitsubishi UFJ Financial Group Inc. President Nobuyuki Hirano has been among the most vocal critics of the negative-rate policy, saying it is crimping interest income and fueling anxiety among companies and households.

With yields sinking below zero on government bonds up to a decade, Japan’s banks have been cutting their holdings at the fastest pace in almost three years. MUFG is concerned at the prospect of incurring losses on the securities because of the policy, the Nikkei newspaper reported earlier.

“It’s shocking,” said Mari Iwashita, chief market economist at SMBC Friend Securities Co. “The biggest market player is posing the question of whether the current BOJ policy is appropriate or not.”

Other major banks may follow, according to Makoto Suzuki, a senior bond strategist in Tokyo at Okasan Securities Group Inc. Suzuki said that while he does not see a large impact immediately, the primary dealer system had contributed to stable absorption of JGBs into the market over the long term.

Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest lender by market value, is not considering withdrawing, spokesman Takafumi Sasaki said by phone. Mizuho Bank Ltd., part of the third-largest lender, hasn’t decided anything, spokeswoman Masako Shiono said.

Chief Cabinet Secretary Yoshihide Suga said participation as a primary dealer is up to individual banks.

“We will work toward appropriate JGB management policy based on close communication with the market while monitoring market trends to ensure the stable absorption of bonds continues,” Suga said at a regular news briefing in Tokyo.

The Finance Ministry introduced the primary dealer system in 2004 to improve liquidity and stability in government bond markets. The 22 participants are entitled to exchange opinions with ministry officials in return for an obligation to bid for and purchase a certain amount of bonds at each auction. The U.S. and European nations operate similar systems.

MUFG will still have a presence in the primary dealership, even if its main lending unit withdraws, through its two securities joint ventures with Morgan Stanley. Mitsubishi UFJ Morgan Stanley Securities Co. was the second-biggest buyer at the auctions in the six months ended March, trailing only Daiwa Securities Group Inc., according to the Finance Ministry.

Brokerages are the largest buyers of Japan’s bonds at the auctions because they purchase them to later sell to investors.

BOJ Gov. Haruhiko Kuroda introduced the policy of charging financial institutions on some of their excess reserves in January to lower interest rates, spur lending and spark inflation. His policy board next meets on June 15-16.

Banks are the worst performing industry group on the Topix stock index this year, tumbling 29 percent. The three biggest banks — MUFG, Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — are forecasting the lowest combined profit in five years for the period ending March 2017.

Royal Bank of Scotland Group Plc gave up its status as a primary dealer in December 2014 amid concerns the BOJ’s unprecedented bond purchasing was distorting the market. Participants told ministry officials a month earlier that market liquidity had declined significantly, minutes of the meeting showed.