Japan Lenders Tapping Fed Dollars for Clients, Bank Group Says
Japan Lenders Tapping Fed Dollars for Clients, Bank Group Says
(Bloomberg) -- Japanese banks are scooping up cheap dollar funding from the U.S. Federal Reserve to satisfy demands for the currency from corporate clients during the coronavirus outbreak, according to the new head of a bank industry group.
Banks in Japan tapped the Fed for more than $180 billion last month alone to become one of the biggest users of the central bank program aimed at boosting global liquidity. With the purchases, the banks are acting as intermediaries by releasing cash into the economy as businesses build up dollar reserves, said Kanetsugu Mike, chairman of the Japanese Bankers Association.
Even amid the market turmoil caused by the pandemic, Japanese banks aren’t experiencing dollar funding difficulties as they did during the height of the global financial crisis more than a decade ago, Mike, 63, said in an interview. The Bank of Japan has encouraged banks to borrow as much as they wanted through the Fed’s expanded swap lines to ease a dollar shortage, people with knowledge of the matter said.
“As a whole, we are not in a situation that could cause concern for the financial system,” said Mike, who is also president of MUFG Bank, after stepping down Tuesday as chief executive officer of MUFG parent Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank.
Dollar funding has long been an issue for Japanese banks as they aggressively expand overseas. While the lenders have plenty of yen-denominated deposits from customers, they rely on market funding including bond issuance to procure dollars and other foreign currencies, which often jump in price during market stress.
“Companies are bracing themselves for unexpected events in a move that has added to demand for dollars, and banks are likely working to get hold of enough funds,” said Hideyasu Ban, an analyst at Jefferies in Tokyo, commenting on the Fed purchases.
Another reason for Japan’s unprecedented take-up of the Fed program is the low cost of the funds. The facility has allowed banks to borrow dollars for three months at 0.35%, compared with 2% if they do so against the yen in foreign-exchange markets.
In all, Japan’s banks have taken down $185 billion, more than the entire euro area.
That’s beginning to ease stress in market-sourced dollar funding. The premium for floating dollars over yen -- as seen in the three-month yen-dollar cross-currency basis -- hit its narrowest in a month on Tuesday.
Mike said banks’ dollar funding has become more robust since the global financial crisis that saw the collapse of Lehman Brothers Holdings Inc. “In terms of dollar liquidity for Japanese banks, the situation is not the same as the time of Lehman,” he said.
The Japanese Bankers Association represents more than 100 banks in the country, and its chairmanship rotates annually among Japan’s top three lenders.
Recessionary Hit
Japan’s economy has probably slipped into recession, with Goldman Sachs Group Inc. calling for a contraction of as much as 3.1% this year. Amid the slowdown, MUFG has seen strong demand for loans, especially via online applications, Mike said.
The number of online loan requests by small and medium-sized businesses tripled in March compared with November, before the pandemic struck, he said. Growth in unsecured loans made to individuals online and by phone also tripled last month from a year earlier, he added.
Mike said it’s too early to forecast the impact of the pandemic on loan portfolios.
“It’s not that companies have lost their fundamental competitiveness or are making bad investments,” he said. “I expect businesses will be back on track once corporate activity resumes.”
©2020 Bloomberg L.P.