Research Team at NAB, suggests that the launch of negative interest rate has witnessed both a downward shift and flattening of the yield curve, with the benchmark 10-year JGBs falling into negative territory. Key Quotes • “This has, in turn, lowered borrowing costs for the Japanese Government, as well as households and businesses. Average contracted rates on new loans and discounts fell from 0.927% (p.a.) to 0.806% - according to BOJ. • Negative rates lower borrowing costs, but do come with potential side effects. • However, this is eroding profits from Japanese banks. Banks typically borrow at the short end of the yield curve and invest in longer-term JGBs. A flatter yield will limit this source of revenue. This might compel banks to invest in longer-term securities, or seek alternative (and potentially risky) sources of investments. • According to analysis from CLSA, a brokerage, Japan Post Bank and other domestically focussed regional banks are likely to be more affected by negative interest rates than the larger, globalised Japanese banks. Standard and Poor’s estimates that operating profits at major Japanese banks could be 8% lower; regional banks could experience a 15% decline. • The volume of cash in circulation grew by 6.7% over the year to February 2016, according to BOJ data, the quickest since February 2003. According to the Nikkei publication, ¥10,000 notes are the most popular denomination. There has also been anecdotal evidence of increasing consumer demand for safes and home security, as demand for cash holdings rise – potentially depriving banks of funds. • Consumers are also showing increasing interest in the ‘tomonokai’ loyalty clubs of department stores such as Mitsukoshi, Daimaru and Takashimaya. They offer account holders annual bonuses between 5-8% in annual bonuses, a very attractive return relative to bank and bond deposits. Besides department stores, construction and real estate could also benefit from the low interest rate environment. • A number of Japanese corporations are taking advantage of the lower rates by issuing long term debt at record low yields. West Japan Railway became the first corporation to issue 40-year bonds. Food and pharmaceutical manufacturer, Ajinomoto, witnessed very strong demand for its 20-year bonds at a yield of 0.939%. • The BOJ has exempted Money reserve funds (MRFs) from negative interest rates. These are funds that brokers use to invest clients’ cash during times of equity market turbulence. The aim of the policy was not to dissuade Japanese investors from investing in equities. • February 2016 (the first full month since negative rates were introduced), witnessed strong demand for international securities, particularly long-term debt. Life insurance corporations were major buyers of international debt securities, according to Finance Ministry data. Negative rates have raised concerns about the ability of insurance companies meeting their pension liabilities.” For more information, read our latest forex news.