Japan banks scratching their heads in hunt for dollar

(From Nikkei Asian Review)

By Yoichi Takita, Nikkei senior staff writer

Japanese megabanks have remained aggressive in moving more of their money to overseas assets in recent years. All those efforts, however, appear to have backfired.

dollBanks in Japan are starting to face difficulties in borrowing dollars on global money markets. The bad omen is attributable to a surge in the “Japan premium” — the extra interest that Japanese banks have to pay to raise funds overseas.

This trend is fueled by growing speculation — the U.S. Federal Reserve will raise its target for the federal funds rate next month, even amid growing year-end funding demand.

Yen-dollar basis swaps are widening sharply, as banks around the world are scrambling to secure dollars. A basis swap is an exchange of floating interest rates of two different currencies.

Basis swap spreads with one-year maturity have expanded to slightly more than 0.7%, the level they hit after the 2008 collapse of U.S. investment bank Lehman Brothers and the 2011 Great East Japan Earthquake.

One source of concern is U.S. banks, which are hesitant to put the greenback into the market. Of course, they are not waiting for higher interest rates. They now have no room to finance others, as financial regulations are increasingly strengthened. A dwindling supply of dollars will automatically push up the interest rates.

Megabank blues

Japanese three megabanks’ global operations accounted for 33% of their total profits for the year ended March 2015, a 100% jump from the 17% for fiscal 2011. The banks are Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group.

     Japanese banks have increased the size of their overseas assets by expanding their business abroad, thanks to overseas expansion of Japan Inc. The figure stands out compared with the world’s other banks, except those in China. They have also been successful in recruiting new borrowers switching from their foreign competitors. In contrast, Western banks have cut back their asset size. Read more

Categories: Asia Unhedged, Japan

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