THE FINANCIAL TIMES – February 26, 2016 – Japan Post Bank, the former state-owned financial group that collects the deposits of more than 100m account holders, will be hit significantly harder than the rest of the banking sector by the country’s negative interest rate policy, say people familiar with the matter.
JPB’s vast current account at the Bank of Japan will be a notable source of pain, say analysts. The negative rates policy, which came into effect last week, will subject an estimated Y10tn of cash parked at the BoJ by the nation’s combined financial institutions to an interest rate of minus 0.1 per cent.
Brian Waterhouse, banks analyst at CLSA said that based on what is known about the relative sizes of the excess reserves that the Japanese banks have parked at the BoJ at the end of January 2016, it was “highly plausible that 80 per cent of the Y10tn reserves now subject to negative rates would be Japan Post Bank’s”.
Analysts warn that the negative rates policy will place JPB in the unprecedented position of hoping the Japanese public deposits less of its cash across the bank’s 24,000-strong branch network.
Financial sector analysts are warning that fallout from negative rates already risks starving Japanese savers of options and encouraging them to hoard cash — the opposite of what the “Abenomics” economic growth programme intended.
Earlier this week, JPB joined the country’s megabanks in cutting savings account rates about 20 basis points to 0.001 per cent. Many brokers have suspended sales of money market funds, and life insurers have halted sales of some savings-type products.
On the disproportionate effect of negative rates on JPB, Robin Winkler, a strategist at Deutsche Bank said: “Whether this asymmetric cost distribution was predicted, let alone intended, by Bank of Japan staff when designing the system is unclear.”
The broader damage to the business model of JPB, which holds 45 per cent of its asset portfolio in Japanese government bonds and derives about 90 per cent of its revenues from domestic interest income, is expected to pile pressure on management to accelerate efforts to diversify the investment portfolio into corporate bonds, overseas sovereign debt and private equity.
“When it looks around at potential ways to improve its fortunes, the management of Japan Post Bank has a rough road ahead,” said Brian Waterhouse, a banks analyst at CLSA. “Introducing fees would be politically very difficult indeed, and they can’t immediately rev up a big push for investments outside Japan without a long period of hiring and training.”
The bank’s disproportionate vulnerability to the BoJ policy has emerged just three months after it completed its initial public offering — a highly politicised privatisation that saw the government of Prime Minister Shinzo Abe pushing millions of Japanese to become stock investors for the first time.
JPB shares are trading 16 per cent below their IPO price, and the rest of the Japanese banking sector has suffered a plunge in stock values of more than 20 per cent since the negative interest rate policy was announced.
Efforts by JPB to avoid expanding its deposit base — and with it the volume of funds subject to negative rates — have already begun.
In early January, before Haruhiko Kuroda, BoJ governor, stunned markets with the negative rates announcement, JPB had been preparing for a Y8tn deluge of cash as a popular 10-year savings product it sold in 2016 matures.
In keeping with tradition, JPB designed a new product that would offer a small spread over the basic deposit rate with the expectation that most of the Y8tn would be rolled back into its coffers. With the advent of negative rates, those plans have been shelved.
The challenges of generating profits in Japan’s shrinking domestic banking market were underscored on Friday when two regional lenders, Fukuoka Financial and Eighteenth Bank said they would merge next year.