When economic times are scary money flows to the safest haven which in this case is the Japanese yen. Meanwhile the Bank of Japan has introduced negative interest rates. The New York Times reports that bonds follow the Bank of Japan into negative territory.
On Tuesday, the yield on Japanese 10-year bonds, the benchmark of government borrowing, dropped to zero for the first time. They quickly fell into negative territory, meaning some investors were buying bonds despite knowing that if they held them until maturity, they would come away with less money than they paid.
And on top of that, a strong yen dragged Japanese stocks down more than 5 percent in the worst trading day this year.
The reversal of bond-investor logic flows from the introduction of negative interest rates by the central bank, the Bank of Japan, experts say. The bank’s governor, Haruhiko Kuroda, surprised markets on Jan. 29 by announcing that it would start charging private-sector lenders a penalty of 0.1 percent to hold onto their excess cash, or reserves.
If you are a bank in Japan and want to keep extra cash with the central bank you will pay a tenth of a percent interest for the privilege. If you buy a Japanese bond you may pay as much as 0.035% interest for the privilege. Who gets hurt most in this situation?
Japan Post Bank Co.
According to The Japan Times the Japanese institution worst hit by negative interest rates on bonds is Japan Post Bank Co.
Japan Post Bank Co. stands to lose the most from the Bank of Japan’s decision to introduce negative interest rates as plummeting bond yields underscore its reliance on the country’s debt for income.
The postal bank, one of the biggest holders of Japanese government bonds, gets more than 90 percent of its profit from interest income, according to Shinichiro Nakamura, a Tokyo-based senior analyst at SMBC Nikko Securities Inc. He sees the company’s earnings taking a bigger hit from the BOJ’s action than the nation’s three so-called megabanks, which unlike Japan Post have been expanding abroad and diversifying into fee businesses.
As of 2008 Japan Post Bank was the world’s largest deposit holder. In Japan you can go to the post office and make a bank deposit! In a nation of savers Japan Post Bank Co. is where most folks save. The bank buys government bonds with its deposits and pays interest to its customers. Will this bank end up charging customers for holding their money as a result of negative interest rates on Japanese bonds?
Will This Spread to the USA?
What is the risk of deflation and negative interest rates in the USA? As far back as last fall Larry Summers said that Yuan devaluation raises risk of deflation in the US according to News Max Finance.
China’s devaluation of the yuan is seen as the latest salvo in a global currency war. And it could hurt the United States, a non-participant in the war, says former Treasury Secretary Larry Summers.
The renminbi has dropped 3 percent since Chinese authorities began the devaluation Tuesday. The dollar traded at 6.3939 yuan Friday, up from 6.2086 yuan Monday.
As for the impact on us, “the risks of a deflationary, secular stagnation in the U.S. would be increased by a large devaluation of the renminbi.”
If this is the case how much will you pay for a US bond?