BOJ faces unhappy banks amid policy move

Bloomberg

As well as a surging yen, non-existent inflation and a weak economy, Bank of Japan Governor Haruhiko Kuroda has something else to think about when deciding monetary policy this week— unhappy banks.
Japan’s biggest lender, Bank of Tokyo-Mitsubishi UFJ Ltd, has led the way in voicing concerns about the negative interest-rate regime introduced by Kuroda earlier this year. Now it’s threatening to withdraw from the club of 22 financial firms that buy newly issued government bonds, worried that record-low yields will sap returns.
With inflation far away from the BOJ’s 2 percent target and the nation’s currency this week reaching a 21-month high against the dollar, Kuroda is under pressure to act. Yet if his board decides to lower the key rate below the current minus 0.1 percent, as predicted by some economists, that would further squeeze interest income at banks that are facing a plunge in share prices and forecasting the lowest profit in five years.
While Bank of Tokyo-Mitsubishi UFJ quitting as a primary bond dealer is unlikely to stop the central bank from adding stimulus, “concerns are growing as to whether the cost of BOJ measures will outweigh the benefits,” said Hiroshi Shiraishi, a senior economist at BNP Paribas SA in Tokyo.

BOJ Split
Views among officials inside the BOJ are split on the implications of Bank of Tokyo-Mitsubishi UFJ leaving the bond group, according to people familiar with discussions at the central bank.
Some officials don’t think the move will cause problems for the BOJ’s easing measures and bond-purchase program, according to the people, who asked not to be identified as the talks are private. It’s a good thing if banks shift their focus away from the government debt market because the BOJ wants them to be looking instead at riskier assets, according to this group, the people said. Other officials expressed concern that the scale of the BOJ’s unprecedented monetary easing is raising questions about the functioning of the primary-dealer system, according to the people.
“Japan’s biggest lender moving to withdraw as a primary dealer is seen in the market as a voice for the banking industry,” said Takashi Miura, an analyst at Credit Suisse Group AG in Tokyo. “It’s a symbolic act to rebuff negative rates and any further cutting of the rate.”
About 28 percent of economists forecast the Bank of Japan will ease monetary policy at the meeting ending on Thursday, and 55 percent predict a change on July 29, according to a survey. A deeper cut to negative rates and increased purchases of exchange-traded funds are the two most likely measures to be taken, the poll showed.
Japan’s bonds and currency have surged this week on demand for safe-haven assets prompted by concerns that the UK may vote to exit the European Union. The yield on 10-year notes fell to a record minus 0.185 percent. The yen has climbed about 13 percent versus the dollar this year, while an index of Japanese bank stocks has tumbled 34 percent, the worst performance on the benchmark Topix.
Bank of Tokyo-Mitsubishi UFJ and its parent have been the most vocal against negative rates since Kuroda announced the move Jan. 29. Mitsubishi UFJ Financial Group Inc President Nobuyuki Hirano delivered a rare broadside against the policy in an April speech, saying it has fueled anxiety among households and companies.
“While Hirano stopped short of voicing outright opposition, it was groundbreaking for him to say what he did in public,” said Miura of Credit Suisse. “It’s important for management to express their thoughts rather than just do as they’re told.”
Other major Japanese banks have been less strident. Takeshi Kunibe, head of the Japanese Bankers Association and president of Sumitomo Mitsui Banking Corp., said lenders face a “difficult year” because of the policy. In a March interview, he urged the BOJ to carefully consider its effects before deepening rate cuts.
Shrinking Margins
Kuroda has said that he expects objections to negative rates to recede. Monetary policy is aimed at benefiting the entire economy and not just banks, he said on April 28.
Banks’ net interest margins are shrinking because they are having to cut rates on loans more than deposits, which are already virtually at zero percent and unlikely to enter negative territory for ordinary savers. “Japan will not introduce a policy where individuals are charged for depositing money in the bank,” Shigeru Ishiba, minister in charge of regional revitalization, said in an interview on Tuesday.
An adviser to Prime Minister Shinzo Abe criticized Bank of Tokyo-Mitsubishi UFJ’s stance. Nobuyuki Nakahara, who served on the BOJ’s policy board during its first stab at quantitative easing in 2001, questioned whether the company is acting in its own interests or those of the nation.
“I can’t understand” why the bank would wish to quit the primary dealer group, Nakahara said in an interview on June 10. “A company has the freedom to say or do what it wants but also a responsibility.”

Yen holds near 19-month high on Central Bank, Brexit risks

Bloomberg

The yen is hovering near its highest level against the greenback since October 2014 on haven demand before central bank meetings this week in the US, Japan and UK, with the British referendum on whether to leave the European Union looming.
The Japanese currency has advanced against all its 16 major peers this month as anxiety over the so-called Brexit referendum prompted investors to seek the safest assets.
While most economists predict the Federal Reserve, the Bank of Japan and the Bank of England will refrain from policy changes, investors will closely watch the communications from the authorities after the meetings for clues on future direction.
“The yen tends to outperform the dollar in periods of heightened risk aversion,” said Elias Haddad, a currency strategist at Commonwealth Bank of Australia in Sydney.
“The dollar-yen crosses will remain heavy because of growing concerns that Britain will vote to leave the EU.
However, if the Bank of Japan announces more easing measures tomorrow, it could briefly spike up towards its 40-day moving
average near 108.70.”
The yen was little changed at 106.13 per dollar after touching 105.55 on May 3, the strongest level since October 2014. Japan’s currency was at 118.79 versus the euro, holding a six-day gain. It reached 118.52, the strongest since January 2013.

‘Leave’ Momentum
Five polls in two days have shown Leave ahead, by between 1 and 7 points, while one had 46 percent supporting ‘Remain’ and 45 percent for ‘Leave.’
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, was steady after rising 0.5 percent to its highest level in almost two weeks.
Australia’s dollar weakened 0.2 percent to 73.41 US cents after Westpac Banking Corp’s consumer confidence report showed sentiment index fell 1 percent in June compared to the prior month.
The New Zealand dollar dropped 0.3 percent to 69.74 US cents.