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Japan overnight call rate falls to zero as BOJ policy kicks in

As the Bank of Japan began charging interest Tuesday on some deposits it holds, rates in the nation’s overnight interbank market are hovering around zero while banks try to catch up in setting negative interest rates on their systems.

The unsecured overnight call rate fell to zero from the weighted average overnight call rate of 0.074 percent on Monday, according to Central Tanshi Co.

“Trading in the unsecured overnight call market is centered around 0.001 percent with some at zero percent,” said Kenji Sato, a manager at the planning and research department of Central Tanshi, a Tokyo-based money-market dealer and broker. “Volume is really subdued compared to normal days as few have systems that can handle negative rates.”

The uncollateralized overnight call market -- ground zero for funding markets because it is where banks lend to each other -- has been the only place in Japan where interest rates stayed above zero for maturities shorter than 10 years. The overnight rate was the one targeted by the BOJ until Governor Haruhiko Kuroda switched the main policy tool to monetary base growth in April 2013 with the move to unprecedented easing.

Yields on benchmark 10-year Japanese government bonds hit a record low of minus 0.035 percent last week amid global financial turmoil that fueled speculation the BOJ will cut the deposit rate again, after announcing on Jan. 29 it would set it at minus 0.1 percent from Feb. 16 for some of the reserves banks hold at the the BOJ. Kuroda has said it is possible to cut negative rates further if needed.

The BOJ estimates that the initial amount subject to the minus 0.1 percent deposit rate will be about 10 trillion yen ($87 billion). It hasn’t indicated a targeted level or range for money market rates or the amount subject to negative rates that is needed to fully exert its intended effects on financial markets.

“We may not see a negative rate today,” Central Tanshi’s Sato said. “But financial institutions appear to be hastily preparing systemic responses to negative rates, so it’s a matter of time before we see deals done at minus rates. I am nervously watching the market.” (Bloomberg)

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