Opinion

Japanese banks and US$ liquidity: Squeezed between expensive deposits and the BoJ

For the last few years, Japanese banks have aggressively expanded their assets overseas, which has helped increased their stubbornly low profitability even after the introduction of negative interest rates by BoJ. Such a successful overseas strategy, profitability-wise, may be at risk due to US$ liquidity developments at a global level.

By: and Date: November 28, 2016 Topic: Global economy and trade

This op-ed was originally published in Asian Banking & Finance.

asian-banking-finance

In fact, US$ liquidity has been ebbing towards tightness, partially because of the reform of the US money market fund and more is to come as the FED hikes rates.

The major source of US$ funding for Japanese banks used to be the US money market funds (MMF), but with its reform last year, the liquidity has dried up massive so that Japanese banks have turned to other sources of US$ liquidity. The reason for the increase in the cost of funding is not only that the LIBOR is already discounting incoming FED hikes but also that the cost of Yen-US$ cross-currency swaps has surged.

The most important source of US$ liquidity for Japanese banks now is wholesale US$ deposits but the cost of funding has also gone quite rapidly. Against such background, the Bank of Japan has been offering limited amounts of US$ liquidity through different facilities.

The first one is the BoJ’s Growth Program, which is designed to offer US$ liquidity to Japanese banks to expand their overseas operations but within a limit and only for growth-enhancing lending. The demand has been so large that the BoJ has had to double the ceiling of US$ to be granted since July 2016.

The second program is the US$ Funds Supplying Operations, under which Japanese banks can borrow US$ up to three months, which is funded through a US$-JP¥ swap agreement between the BoJ and the Fed. In July 2016, the BoJ even introduced a new securities lending facility so that banks can borrow JGBs from the BoJ to use them as collateral for the US$ Funds Operations.

Although the outstanding amount is clearly lower than the peak of the European debt crisis in 2011, banks have actively borrowed US$ from the BoJ before the US MMF reform took place.

The outlook is certainly not brighter for Japanese banks, not only because of the expected tightening by the FED but their liquidity requirements will become tighter with the introduction of the Net Stable Funding Ratio by 2018. Beyond the liquidity issues, there are two additional risks related to their overseas asset growth strategy, namely maturity and interest rate risks.

In conclusion, the combination of tighter liquidity regulations together with higher US$ funding costs, Japanese banks might be forced to review what has so far been quite a successful business model to push a stubbornly low profitability, namely that of expanding their US$ assets.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic
 

Past Event

Past Event

From viruses to wars: recent disruptions to global trade and value chains

How have events in recent years impacted global trade and value chains and how can we strengthen these against future disruptions?

Speakers: Dalia Marin, Adil Mohommad and André Sapir Topic: Global economy and trade Date: April 27, 2022
Read article More on this topic More by this author
 

Opinion

East-west divergence in central bank action will not last much longer

Fed shift towards raising rates will make it hard for China and Japan not to tighten monetary policy.

By: Alicia García-Herrero Topic: Macroeconomic policy Date: February 16, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Understanding Japan’s economic relations with China

What can Europe learn?

By: The Sound of Economics Topic: Global economy and trade Date: January 12, 2022
Read article
 

Blog Post

European governanceInclusive growth

12 Charts for 21

A selection of charts from Bruegel’s weekly newsletter, analysis of the year and what it meant for the economy in Europe and the world.

By: Hèctor Badenes, Henry Naylor, Giuseppe Porcaro and Yuyun Zhan Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: December 21, 2021
Read article More on this topic More by this author
 

External Publication

L’Union européenne et les États-Unis, un an après

Après une année troublée par Kaboul et AUKUS, qu'avons-nous retenu de l'an I de la présidence Biden ? Maria Demertzis revient sur les évènements marquants de l'année 2021 pour la relation entre les États-Unis et l'Union européenne.

By: Maria Demertzis Topic: Global economy and trade Date: December 8, 2021
Read article More on this topic More by this author
 

Blog Post

What to make of the EU-US deal on steel and aluminium?

While deeply disappointing that the surprise deal maintains aluminium and steel tariffs against the EU beyond a modest quota, it alleviates a major irritant in transatlantic relations and contains interesting and innovative features relating to climate policy and to dispute settlement under WTO rules.

By: Uri Dadush Topic: Global economy and trade Date: November 4, 2021
Read article
 

External Publication

European Parliament

Don't let up - The EU needs to maintain high standards for its banking sector as the European economy emerges from the COVID-19 pandemic

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Rebecca Christie and Monika Grzegorczyk Topic: Banking and capital markets, European Parliament Date: October 21, 2021
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

Opinion

European governance

The inconsistency in global strategic relations

All of this talk on strategic retrenchment and autonomy is the language of escalation, not of appeasement and collaboration.

By: Maria Demertzis Topic: European governance, Global economy and trade Date: October 13, 2021
Read article More on this topic More by this author
 

Blog Post

Germany’s foreign economic policy: four essential steps

Germany and the EU need to develop a strong and proactive agenda to manage foreign economic relations, which are essential for German and European prosperity.

By: Guntram B. Wolff Topic: Macroeconomic policy Date: September 23, 2021
Read article
 

Opinion

Relaunching transatlantic cooperation with a carbon border adjustment mechanism

The best way for the EU and the US to jointly introduce carbon border adjustment would be to form a ‘climate club’.

By: Simone Tagliapietra, Guntram B. Wolff and Bruegel Topic: Global economy and trade, Green economy Date: June 11, 2021
Read article More by this author
 

Podcast

Podcast

A transatlantic climate alliance

When Joe Biden visits Europe for the first time as US president, he should begin forging a transatlantic green deal.

By: The Sound of Economics Topic: Global economy and trade, Green economy Date: June 11, 2021
Load more posts