Japanese Int Rate Below 0 question?

Discussion in 'Strategy Building' started by earthman, Jan 24, 2003.

  1. earthman


    Saw today that the Japanese interest is -0.01 percent.
    If I barrow 100 yen, I only have to pay back 99.99 yen.

    I do not understand how any institution can make money, lending at a negative interest rate.

    Can any one explain this.

  2. Babak


  3. Htrader

    Htrader Guest

    While the nominal interest rate may be negative, the real interest is positive in Japan.

    Real = nominal - inflation.

    So if inflation is negative, then it still costs you something to borrow money, even if the nominal interest rate is below 0.
  4. Foz


    Where did you read or hear about the negative interest rate? I'm interested to find out what caused it. Negative nominal interest rates are anomalous and don't normally occur.

    My best guess for the reason here is that several banks were bidding for an overnight rate and there was so much supply of currency that some automated auction just kept lowering the rate -- right through zero. Or else perhaps there is some regulatory or tax reason that banks don't want to hold cash overnight and are willing to pay someone to take it off their hands.

    You are right that normally people won't lend at a negative nominal rate. Why take 99 yen tomorrow for 100 yen today when you can just put the 100 yen in your mattress and have 100 yen tomorrow? 100 yen is always better than 99 yen regardless of the inflation rate.
  5. IR is at zero. Cannot go any lower.
    Real Interest Rate can be below 0 if inflation is an issue, but in Japan the issue is more deflation, which means the IR is probably around .5 - 1% depending on the delflation rate.
  6. nitro


    Why not borrow Japanese Yen and lend Euros then?

  7. I think we will ALL get a lesson about deflation soon.
  8. I had this idea a little while ago, and it could work, the only thing is that you may have to be a SWAP artist to deal with currency exchange risks. But I do agree that this can be done ;)
  9. Trajan


    Link: here

    Japanese interest rate dip below zero
    By Mariko Sanchanta in Tokyo
    Published: January 28 2003 11:01 | Last Updated: January 28 2003 11:01

    Japan ventured into uncharted territory on Friday as domestic interest rates fell below zero for the first time in the country's history.
    The overnight call rate on Y15bn of funds traded between foreign banks fell to negative 0.01 per cent. The lender was ABN Amro and the borrowers were Societe Generale and BNP Paribas, according to market sources.
    The negative rate means Societe Generale and BNP are, in effect, being paid to borrow funds as they find themselves in the rather fortunate situation of having to pay back less than they were lent.
    ABN Amro could also potentially profit from the deal as some foreign banks are able to obtain funds at a negative rate. Interest rates in the euro-yen market outside of Japan dipped into negative territory in mid-December.
    With long-term interest rates already virtually nil under the Bank of Japan's "quantitative easing" policy, bankers said Friday's record move into negative territory was more a symbol of the country's decade-long economic malaise rather than an indicator of future financial chaos.
    The peculiar situation was likely to be a one-off, they said, pointing to the relatively small size of the deal. But negative interest rates could potentially boost revenues at foreign investment banks, where investment returns have weakened due to a dearth of attractive investment opportunities.
    "Because of the BoJ's quantitative easing policy where interest rates are zero, we don't have any earnings opportunities through the domestic market," said one vice president at foreign investment bank in Tokyo. "If we can borrow money at a negative rate, we can profit from the deal." Critics say that the BoJ's policy of keeping interest rates at virtually zero and flooding the money market with liquidity has largely been ineffective in stimulating the economy, which is set to contract in the fourth quarter, according to economists.
    "The BoJ has to buy more Japanese government bonds (JGBs) or foreign bonds to affect the market.," said Hisashi Sitow, director at Credit Suisse First Boston in Tokyo. "Monetary policy is clearly ineffective, as base money is increasing but growth in the money supply is stagnant."
    Current record low yields on JGBs indicate that investors are not betting on a near-term economic rebound even after nearly four years of falling prices. The yield on the 10-year JGB has recently fallen to a series of four-year lows and the yield on the five-year bond fell to a record low on Friday.
    "This is all part and parcel of a growing loss of faith in Japan's future," said Marshall Gittler, strategist at Deutsche Bank in Tokyo. "JGB movements are telling a story that deflation is set to continue indefinitely."
  10. Nitro

    That trade has happened a lot. Then ever few months, the yen moves 3%+ and some leveraged hedge fund blows up massive. A few large players like Robertson ((I believe, not sure) have really lost their ass on this exact trade b/c they didn't hedge the currency risk correctly.
    #10     Jan 28, 2003