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BOJ's negative interest rate announcement hitting private asset management

The Nikkei index dipped below 17,000 yen on Feb. 5 while the yen rose in the foreign exchange market -- just a week after stocks had surged and the yen weakened as a result of the Bank of Japan's surprise announcement that it would adopt a negative interest rate.

    The return to the original state of affairs has prompted moves that could force individuals to review their asset management.

    With the effects of the BOJ's announcement having effectively disappeared, Japan's three megabanks -- The Bank of Tokyo-Mitsubishi UFJ (BTMU), Mizuho Bank and Sumitomo Mitsui Banking Corp. (SMBC) -- decided they would reduce interest rates for fixed-term deposit accounts between two and 10 years starting Feb. 8. In the case of BTMU, interest rates will be cut by 0.015 percentage points to 0.06 percent, and for its "Super Teiki" (Super fixed-term accounts), whose deposits are less than 3 million yen, interest rates will be set at 0.025 percent for all fixed terms between one month and 10 years.

    In response to the decisions made by Japan's top three banks, other banks are expected to follow suit. Sony Bank, which only offers online banking, will reduce its interest rate for ordinary savings accounts to 0.001 percent, meaning that a deposit of 1 million yen in an ordinary savings account for a year will earn the account holder just 10 yen in interest.

    Sales of various asset management products have also been halted. All 11 asset-management companies that offer money management funds (MMFs) using Japanese government bonds, among others, have effectively stopped selling such products. Money managing giant Nomura Asset Management, for example, announced on Feb. 5 that it would stop new sales of such products starting Feb. 9. While some money managing companies will continue to take applications for asset management products, some face the possibility that they will be paid back to clients in April, depending on how well -- or poorly -- they do. Financial products like MMFs are considered to entail a lower risk than stocks. That asset management companies are halting sales of such products means that there likely needs to be an overhaul of how personal assets are managed. The Ministry of Finance, meanwhile, has partially stopped sales of government bonds geared toward individuals, citing falling interest rates.

    The abovementioned moves are being taken in response to the sudden drop in long-term interest rates -- used by financial institutions as an index to determine interest rates for deposits -- in response to the BOJ's announcement that it would implement a negative interest rate. This does not bode well for insurance companies, which have relied on government bonds and other low-risk financial products to manage their assets. "If the current situation continues, we will face very tough financial circumstances," says a representative for one major life insurance company. "This might ultimately force us to raise insurance premiums."

    The BOJ will adopt a negative interest rate starting Feb. 16. It is a financial policy aiming to nudge private banks to make more loans to the private sector, taking service charges from banks when they make deposits to the BOJ; the deposits of private individuals are not subject to the negative interest rate. BOJ Gov. Haruhiko Kuroda said at a meeting of the House of Representatives Budget Committee on Feb. 4, "(In Japan) there is no possibility of a negative interest rate being applied to individuals' savings at private banks." However, some observers point out that because a lowered interest rate means that banks will have trouble making profits, ATM charges and remittance fees could possibly go up.

    Meanwhile, those taking out loans to pay for homes and cars will benefit from the negative interest rate, since the interest rates of their loans will be lowered. Mortgage rates at major banks are already at the lowest levels on record, but Shinsei Bank further reduced its mortgage rates on Feb. 3, signaling the likelihood that the trend will spread.

    In the week since the BOJ's negative-interest announcement, long-term interest rates fell from 0.2 percent levels. In the Tokyo bond market, the market yield of newly issued 10-year government bonds -- which is an index for determining long-term interest rates -- was at 0.02 percent. Not only was this down 0.03 points from the previous day, but it was also a record low. This is explained by predictions that financial institutions will divert funds that they might have otherwise deposited to the BOJ to bond markets when the negative interest rate goes into effect, thereby pushing government bond prices up (and interest rates down).

    In the Tokyo Foreign Exchange Market, the yen depreciated temporarily after the BOJ announcement, reaching 120 yen levels to the dollar. By Feb. 5, however, the yen had appreciated to about 116 yen to the dollar, an appreciation of at least 1 yen from the previous day.

    In the Tokyo Stock Exchange, the strong yen forced export-related stocks to fall, and due to concerns over deflating investment yields, bank shares plummeted. The Nikkei closed on Feb. 5 at 225.4 yen lower than the previous day at 16,819.59 yen, recording a consecutive four-day drop, and reaching levels before the BOJ decided to adopt a negative interest rate.

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