And the Bitter Irony?
All 11 Japanese asset managers that offer money market funds have stopped accepting new investments into them and are planning to scuttle them after returning their remaining assets to investors. This marks another big accomplishment of negative interest rates.
After years of zero-interest-rate policy, and after gobbling up every Japanese government bond that wasn’t nailed down, the Bank of Japan decided in January to go beyond what had already failed and introduced its negative-interest-rate policy.
As a result of QQE, as it calls its asset-buying program, and the new NIRP, even the 10-year JGB yield is now negative, and yields on shorter maturities are sinking deeper into the negative. Money market funds, which invest in commercial paper and government debt with maturities of less than one year, are at risk of seeing these negative yields eat into their principal.
Money market funds, unlike bank deposits, do not guarantee the principal, but due to their reliance on short-term paper with high credit ratings, they’re considered one of the safest investments, and falling below par value is considered bad form and can trigger runs on the offending fund and neighboring funds by spooked investors.
With an average yield of a record low 0.02% currently – only a hair away from going negative – money market funds are at the verge of systematically falling below par value, not just once, but deeper and deeper, given that the current monetary policy could last for years, or until something big breaks.
Fund managers could absorb the losses, but that’s no fun either. So they’re drawing the line:
Nomura Asset Management and Daiwa Asset Management intend to repay investors by August and October, respectively. Mitsubishi UFJ Kokusai Asset Management is preparing to do so in April or May. Five other companies, including Nikko Asset Management, had announced plans as of Monday to return customers’ money.
Money markets used to be popular among retail investors in Japan. During their heyday in May 2000, according to the Nikkei, assets peaked at ¥21 trillion ($186 billion at today’s exchange rate). But Japan’s zero-interest-rate policy at the time had pushed funds to venture into US commercial paper to get some visible yield, including Enron debt. When this debt collapsed, funds that held it fell below par; what was once considered a nearly risk-free investment was teaching a lot of folks some lessons.
And they began pulling their money out. By the end of last week, assets were down to ¥1.37 trillion, or a measly $12 billion. Now NIRP is finishing off what ZIRP has started.
And money market funds aren’t the only victims of NIRP. The Nikkei:
The impact of negative interest rates is spreading to other financial products. Returns have sunk below 0.02% for money reserve funds, mutual funds similar to money market funds with assets totaling more than ¥10 trillion. Because these funds serve as settlement accounts used in stock and mutual fund trading, returning customers’ assets is difficult. Asset management companies can cover losses to keep their value above par but bear the cost of doing so.
Some life insurers are halting sales of products aimed at savers. T&D Financial Life Insurance will suspend sales of some single-premium whole-life policies March 16.
The bitter irony? Retail investors seeking safe investments, so to speak, with a nominally positive if barely visible yield are running out of options. They’re being pushed further into the arms of their loving government that concocted this situation in the first place:
Retail investors with narrowing options are seeking products that guarantee better returns. A February auction of Japanese government bonds aimed at individuals drew ¥233.5 billion in bids, up ¥57 billion from a month earlier and the most in 19 months. The notes’ 0.05% yield at issuance is higher than the 0.01% return on time deposits offered by major banks.
The Bank of Japan has already killed off the formerly vast JGB market, where trading has slowed to a trickle. Now the primary dealers buy the huge piles of negative-yielding debt from the government when it issues them and then turn around and sell these piles to the BOJ at even more negative yields, pocketing the difference, thus making a guaranteed profit on these otherwise money-losing instruments.
The BOJ in turn is funding the government deficit by buying up all the new paper. It’s also buying big chunks of the accumulated debt. And now it’s paying the government interest on that acquired debt via the mechanism of negative yields, which drives the whole scam to a new level of absurdity.
But wherever central banks have inflicted negative interest rates on the land, banks are trying to figure out how to dodge them. In Germany this has taken on a new form. Read… It Begins: Palace Revolt against ECB’s NIRP