Japanese Government Bond Dealers Stand Firm As Negative Yields Drive Top Bank To Quit

While Japan's biggest bank moves to quit as a primary dealer of domestic government bonds in an apparent protest against a negative interest rate policy, its peers are sitting tight for the moment.

Mitsubishi UFJ Financial Group Inc.'s Bank of Tokyo-Mitsubishi UFJ Ltd. plans to withdraw from its role as a primary dealer of Japanese government bonds, The Nikkei reported June 8.

"It is difficult to meet all purchase obligations in a negative interest rate environment," Bank of Tokyo-Mitsubishi CEO Takashi Oyamada said at a June 10 press conference, speaking in his capacity as chairman of the Osaka Bankers Association.

The move comes just months after the Bank of Japan began applying a negative rate to some reserves from commercial banks, the latest in its stimulus efforts that has sent bond yields plummeting. The monetary measure is part of Prime Minister Shinzo Abe's stimulus efforts, dubbed Abenomics.

It is becoming harder to earn decent fixed income from debt investments in Japan, as yields decline.
"We would focus on the message [Mitsubishi UFJ Financial] is trying to send — that the negative interest rate policy is negative for the banks and they are in a strange position of having to support it," said Makarim Salman, head of research for Japanese financial firms at Jefferies.

Primary JGB dealers have to make bids for at least 4% of every new offering and buy at least an average 0.5% of short-term and 1% of long-term newly issued JGBs every six months, according to the Ministry of Finance.

It is becoming harder to earn decent fixed income from debt investments in Japan, as yields decline. Like other Japanese lenders, Bank of Tokyo-Mitsubishi has been trimming its JGB holdings, which totaled ¥21.984 trillion as of March 31, compared to ¥28.954 trillion a year earlier, selling a large chunk to the central bank under a quantitative easing program. Still, it remains the largest holder of domestic government debt among the three biggest commercial banks in Japan.

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"The move by Mitsubishi UFJ Financial is partly an expression of their unhappiness with BOJ's policy, and with Abenomics, which has heavily relied on financial measures that hardly dealt with the most necessary structural reforms," said Hajime Inoue, an economist at the Japan Research Institute.

Fitch Ratings in June downgraded its outlook for Japanese financial institutions including Mitsubishi UFJ Financial, to negative from stable, citing their big exposure to JGBs.

But government bond holdings are still necessary for lenders, as they use those assets as collateral for financing operations with the central bank and for interbank transactions, including U.S. dollar purchases. JGBs are also a trading income source for financial firms.

Sumitomo Mitsui Banking Corp., a unit of Sumitomo Mitsui Financial Group Inc., and Mizuho Financial Group Inc.'s Mizuho Bank Ltd. said they for now have no plans to follow the lead of Bank of Tokyo-Mitsubishi. The three megabanks are the only commercial lenders among 22 firms acting as primary JGB dealers.

Two other Mitsubishi UFJ Financial companies will likely remain JGB primary dealers as well, said Ryoji Yoshizawa, a senior analyst at S&P Global Ratings.

Primary dealers are not simply driven by financial motives.

A mass withdrawal of bond market makers could be a blow to the Japanese government, which has been relying heavily on debt to fuel economic growth. Japan's public liabilities are already more than double its GDP, the highest ratio among Organisation for Economic Co-operation and Development countries.

The Bank of Japan could be caught in a bind by a shrinking pool of JGBs, as it aims to purchase ¥80 trillion of government debt each year under an unprecedented quantitative easing program.

Sumitomo Mitsui Banking President Takeshi Kunibe, also chairman of the Japanese Bankers Association, said at a June 16 press conference that the bank views the role of a primary JGB dealer as an "obligation" for large Japanese banks.

Mizuho executives have not commented publicly on the issue.

"Big financial institutions that are also primary dealers play the role, thinking that their mission is as market makers, and establishing a reliable market in a negative interest environment is probably seen a necessary cost," Yoshizawa said.