Japan funds seek exemption from negative interest rates

15/02/2016 07:37 AST

Japan’s investment industry is seeking protection from negative interest rates as the central bank’s policy comes into effect this week and threatens a $100 billion (Dh367 billion) slab of savings.

The special exemption, which has been discussed between representatives of the investment funds and the Governor of the Bank of Japan, hints at rising panic within Japan’s asset management industry.

The proposed protection, which brokers fear is unlikely to be granted, would cover savings parked in “money reserve funds” (MRF). It would be the first protection of its kind to be demanded since the Bank of Japan announced its negative rates policy last month.

In the wake of the BoJ’s January 29 announcement, which triggered a heavy sell-off of banking and financial industry stocks and helped propel the yen through its biggest two-week gain since the late 1990s, the yield on Japanese government bonds (JGBs) turned negative out to, and including, the benchmark 10-year note.

One of the first practical effects of the BoJ policy shift on the mutual fund industry was a series of announcements from more than 10 Japanese asset management firms that they would no longer accept new investments on their money-management funds (MMF) - popular products that can be used to give investors exposure to higher yielding foreign currency and have attracted a combined Y2tn ($17bn) of assets under management. The main investments of those funds are in Japan’s short-term debt market.

But the effect of the negative rate policy is expected to ripple even more destructively through the business model of the MRFs, according to Tokyo-based asset managers.

Exposure
The MRFs, which are sold as solid products closer in structure to US-style money market funds and with even greater exposure to the domestic bond market, have 11 trillion yen (Dh356 billion) under management.

As well as suffering from falling yields on JGBs, the funds deposit significant volume of cash with trust banks, which in turn deposit a large proportion of that at the BoJ. From Tuesday, part of those excess reserves will incur interest rates of minus 0.1 per cent.

Efforts to secure an exemption from that are understood to have been led by Makoto Shirakawa, the chairman of the Japan Investment Trusts Association (JITA), who last week met Haruhiko Kuroda, BoJ governor.

Gulfnews