Japanese banks are loading up on longer maturity bonds in their hunt for yield, a move that could come back to haunt them whether Abenomics succeeds or fails.
The nation’s commercial lenders bought a net ¥197.4bn ($1.7bn) of super-long Japanese government bonds in January, surging from a net ¥7bn purchase the month before, Japan Securities Dealers Association data showed. Their net buying of all interest-bearing debt was ¥628.3bn, the most since August, suggesting banks prefer to park stimulus cash in fixed-income markets rather than extend credit.
The Bank of Japan’s January 29 decision to charge interest on some reserves is forcing banks to buy longer debt to get positive yields, even though such bonds will suffer larger losses should Prime Minister Shinzo Abe succeed in reviving inflation, or fail and leave the nation with a crippling debt load. The yield on 20-year JGBs plunged below half a percentage point on Tuesday as 10-year, two-year and five-year bonds were all sold at negative yields.
“Japanese financial institutions have a decent amount of JGBs and as the negative-rate policy sends bond yields further down, they are forced to take duration risks by going for longer-maturity debt,” said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co in Tokyo. “Should Abenomics succeed, reviving the economy and prices, the risk of valuation losses due to an increase in yield would be big.”
Abe’s handpicked Governor Haruhiko Kuroda has expanded easing three times, depreciating the yen, boosting stocks and raising corporate profits. Despite almost three years of record bond purchases, the BoJ’s targeted measure of consumer-price increases has been hovering around zero, compared with its goal of 2% inflation.
Negative rates are likely to shrink net interest margins for the nation’s lenders that are already among the lowest in the world.
BoJ board member Takahide Kiuchi said last week the central bank’s negative rates may harm banks’ profits, narrow interest rate margins on loans and reduce yields on financial assets. Kuroda told parliament Wednesday that the direct impact on banks’ profits is limited from negative rates and said he will monitor the matter.
The benchmark 10-year bond yield dropped to as low as minus 0.075% on Tuesday, matching a record low as Japan sold the debt at negative yield for the first time. That on 20-year debt sank to an unprecedented 0.435% and the yield of 30- year securities declined to an all-time low of 0.735% on Thursday.
The commercial banks bought a net ¥559.5bn of long-term JGBs in January, the most since September, the JSDA data showed. The difference between yields on 10-year notes and 20-year bonds shrank to its narrowest since October 2008, underscoring demand for the securities that still have positive yields.
“Yields on super-long JGBs will keep falling and even with this yield curve, there is still money seeking to avoid negative rates,” said Tomohisa Fujiki, the head of interest-rate strategy for Japan at BNP Paribas SA in Tokyo. “The BoJ will continue with its bond buying and yield flattening will be sustained this year.”
The central bank in October estimated that financial institutions could face a ¥7.2tn loss should the yield on yen-denominated bonds rise by 1 percentage point based on data at the end of June.
Still, banks have reduced JGB holdings by 39% since Kuroda began his unprecedented bond-buying programme in April 2013, to ¥102.3tn in January, BoJ data show. The average duration of the securities held by major banks is about three years, according to the central bank.
“Bank JGB exposures at current levels are relatively small compared with what they have been in the past,’’ said Naoki Morimura, a director at Fitch Ratings in Tokyo. “Current durations of two to three years aren’t going to suddenly jump to five or six, and as long as there isn’t that big a shift, I don’t see there being such a large risk.’’
The BoJ estimated about 10tn yen initially would be subject to a minus 0.1% interest rate it charges for financial institutions. Bond risks of Japanese lenders have risen the most among Asian banks this year, according to credit- default swaps data from CMA.
“JGB yields are in uncharted waters with the introduction of negative rates,” Mitsubishi UFJ Morgan Stanley’s Muguruma said. “There’s the possibility of zero yields or even negative rates” for JGBs due in 20 years or more, she said.