Japan's commercial lenders lobby BOJ to stop buying corporate bonds at negative rates

by Takashi Nakamichi


Commercial lenders are privately complaining to the central bank about its purchases of corporate bonds at negative interest rates and are asking it to stop the practice, according to people familiar with the matter.

The trigger for the grievances is that the Bank of Japan has continued to buy company notes at yields below zero at monthly operations since February, the people said. Banks are concerned that the downward pressure this puts on corporate borrowing costs in the credit market may force them to reduce the interest rates they charge on loans, further hurting their profitability, according to the people, who asked not to be identified because the information isn’t public.

The banks’ pleas present a dilemma: While the BOJ’s program to hold ¥3.2 trillion ($29 billion) of company notes makes up only a small part of its super-easy monetary framework, retreating could spark speculation among investors that the central bank is starting to move away from five years of radical easing, and possibly destabilize financial markets.

Despite the complaints, some BOJ bureaucrats figure a policy change on corporate bonds wouldn’t be appropriate due to concern about its market impact, even though they are skeptical about whether the measure is doing much to spur inflation, the people said.

A BOJ spokesman declined to comment.

“They are probably continuing that measure not because they find it effective, but because there is no good excuse for ending it,” said Takahide Kiuchi, a former BOJ board member. If the central bank scrapped corporate bond purchases or lowered the ¥3.2 trillion target, investors might interpret it as the beginning of “official normalization” and possibly push the yen higher, he said.

The behind-the-scenes lobbying from banks is the latest sign of pressure on the BOJ to adjust its monetary stimulus program, as policymakers seek ways to make it sustainable and less of a burden to commercial banks’ profitability. While economists keeping a close tab on the central bank are unanimous in their view that the BOJ will resist changes at a two-day meeting ending July 31, more than half expect it will begin to normalize its policy sometime next year, according to a Bloomberg survey.

The chairman of the Japanese Bankers Association, Koji Fujiwara, said in May that he’s “concerned” that strong monetary easing, including the negative-rate policy, could have side effects for the financial system if kept for a long time. “If any evidence emerges of excessive side effects, policy changes should be considered,” Fujiwara, who is also the president of Mizuho Financial Group Inc.’s main lending unit, said at a news conference.

Banks have seen their profits suffer as a result of the BOJ’s policy. The margin by which major Japanese banks’ lending rates exceed their fundraising costs has fallen a third of a percentage point to a record low of 0.83 percent since Gov. Haruhiko Kuroda took office in 2013, according to BOJ data going back to fiscal 2005.

The average yield at which the central bank bought corporate debt dropped below zero in February to minus 0.049 percent, and it sank further in the following months to minus 0.186 percent before recovering slightly. The BOJ buys bonds at well above their par value from market participants if that’s necessary to keep its company-note holdings at ¥3.2 trillion. It’s bought ¥750 billion of such debt since February.

Such purchases tend to ripple through the debt market and push down issuance costs, giving companies a “bargaining chip” in negotiating better loan terms with banks, said Toshiyasu Ohashi, chief credit analyst at Daiwa Securities Group Inc.

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