By Gareth Allan & Shingo Kawamoto at Bloomberg
It’s a strange world when bank accounts earning almost no interest are one of the most attractive investments around.
Despite the Bank of Japan’s efforts to spur risk-taking with negative rates, cash is flowing out of funds targeting bills and commercial paper in favor of 0.001 percent savings plans, according to Deutsche Bank AG and Monex Group Inc. Eleven money-market funds stopped accepting new investment in February as banker association data showed deposits climbed almost 6 percent.
The influx of cash is causing headaches for lenders that either have to pay to park reserves at the central bank or invest in a government bond market with negative yields in maturities as long as 10 years. It also undermines Prime Minister Shinzo Abe’s strategy of encouraging companies and households to invest more of their cash, a key part of his goal to reflate the world’s third-largest economy.
“This is investment to savings -- the exact opposite of what the government has been trying to promote,” said Nana Otsuki, chief analyst at Monex, a Tokyo-based online securities firm. “The banks really don’t want excessive amounts of deposits that they can’t invest, but they do want the customers.”
Money-market fund assets plunged 14 percent to 1.39 trillion yen ($12 billion) at the end of February from January, according to the Investment Trusts Association of Japan. The 229 billion-yen outflow was the biggest since March 2003.
As predicted by economists, the Bank of Japan kept rates unchanged at a policy meeting Tuesday, the first since their decision to introduce negative rates in January. The board decided to amend conditions of the policy to exclude so-called money reserve funds from negative rates. Differing from money-market funds, they are used by brokerages to settle securities trading for clients.
With banks including Mitsubishi UFJ Financial Group Inc. also cutting loan rates to record lows, they face a profit squeeze unless they can find ways to stem the flow of unwanted deposits. Their dilemma: either start charging account holders and risk losing clients, or keep deposit rates positive and find other ways to offset the costs of holding excess reserves at the BOJ.
Monex’s Otsuki is among analysts who say banks may consider charging fees on accounts, starting with corporate customers. Deutsche Bank analysts Masao Muraki and Hiroshi Torii said lenders may “ultimately place restrictions on large corporate deposits and money trusts,” according to a March 8 note. “We expect a heavy flow of funds seeking to avoid negative interest rates” shifting into bank deposits, they wrote.
Of Japan’s three megabanks, MUFG, the largest, is the only one to rule out charging its corporate clients, with spokesman Taiki Kitaura saying it isn’t considering such a move. Mizuho Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. haven’t decided anything on the matter, spokesmen for the Tokyo-based banks said.
BOJ Governor Haruhiko Kuroda said in a speech on March 7 it is “virtually impossible”that Japanese banks would foist negative rates onto depositors and risk losing customers or triggering withdrawals. In European countries with negative rates, banks haven’t resorted to imposing them on retail deposits, Kuroda said, though some are charging institutional clients.
The problem is more pressing in Japan, where weak credit demand means almost a third of deposits, or 205.8 trillion yen, isn’t lent to borrowers. The average ratio of loans to deposits at the 87 companies on Japan’s Topix Banks Index is 69 percent, while in Europe’s Stoxx 600 Banks index it is 131 percent, data compiled by Bloomberg show.
That the BOJ would execute an easing policy leading to an increase in costs “wouldn’t have been in the wildest dreams” of most banks, Ryutaro Kono, Tokyo-based chief economist for BNP Paribas SA, wrote in a March 11 note. “Criticism of the negative-rate policy has been extremely harsh because of the impact it has on the performance of financial institutions.”
Nomura Asset Management Co.’s money-management fund, which invests in assets such as commercial paper and short-term government bonds, yielded just 0.014 percent on Monday, down from 0.043 percent on Jan. 28, the day before the BOJ announcement. Japan’s unsecured overnight call rate has been at zero or below since Feb. 18. Benchmark 10-year bonds yielded minus 0.02 percent at 1:28 p.m. Tuesday in Tokyo.
To be sure, cash from money-market funds may only stay in deposits temporarily before it finds a new home in other investments. Even if all of the 1.39 trillion yen in such funds moved to bank accounts, it would only increase their 638 trillion yen of deposits by about 0.2 percent. And the monetary authority’s three-tiered negative-rate system means only a portion of lenders’ reserves are incurring charges.
Banks will be reluctant to impose fees on their depositors because the public may see them as “greedy,” said Kobe University Professor Nobuyoshi Yamori. “At least, they don’t want to be the first bank that charges for negative rates.”