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Japan’s lenders bankroll scholarships to dodge negative rates

  • October 18, 2019
  • , Nikkei Asian Review , 6:57 a.m.
  • English Press

KATSUJI KAMEI, Nikkei staff writer


TOKYO — Japanese commercial banks have been snapping up zero-coupon debt issued by a state-backed scholarship body in the latest twist in the the Bank of Japan’s negative rate campaign where no-interest loans can be a good deal for lenders.  


“The Japan Student Services Organization has become the perfect loophole,” said a senior official at Japan’s Financial Services Agency, the state watchdog. To fill the coffers for disbursing scholarships, the JASSO raises funds from private-sector lenders by auctioning bonds, and the securities have been oversubscribed this year by a factor of seven.


That generosity certainly derives in part from socially responsible impulses. But one of the biggest reasons is that the amount of lending to the JASSO decreases the balance subject to the BOJ’s negative 0.1% rate.


The JASSO has raised 521 billion yen ($4.8 billion) in short-term debt so far this fiscal year from April. Subscriptions from financial institutions exceed 3.8 trillion yen. The bonds are auctioned every month, and the website shows a 0% interest rate in nearly every session. The debt offered in September carried a negative rate.


With long-term yields generally hovering in negative territory, a zero interest rate presents an acceptable investment option. But JASSO bonds also tick off three key checkboxes that favor banks: they have no risk of defaulting, are obtained through bidding, and are always available.


The BOJ stores funds from financial institutions in accounts carrying interest rates of 0.1%, 0% and negative 0.1%. As long as banks can move funds to the 0% or 0.1% tranches while lending to the JASSO, the cost savings from escaping the negative rate make the transactions worthwhile.


Although this scheme is described nefariously as a “loophole,” it could be painted as a desired outcome of the negative rate policy, since lenders are stepping up financing.


But if banks are limiting their lending to low-risk options that are convenient to them, that would run counter to the spirit of the BOJ’s negative rate policy.


The prospect of a reversal interest rate — which points to an excessively low rate that negatively impacts the economy — has been a subject of debate. BOJ Gov. Haruhiko Kuroda has repeatedly indicated that there are no problems at this point, citing 2% to 3% growth in bank lending. But given the enthusiasm over JASSO debt, it is time to give the quality of lending more scrutiny.

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