Let's say you are a Japanese bank. Given the pitiful domestic investment choices you have for the near-infinite amount of bank reserves the Bank of Japan will create, where do you put any of them to work? You can't leave them on account in resident money markets because negative rates are punishing. Japanese government bonds (JGB) offer little to no help, “yielding” less than zero on most maturities, too.
This, by the way, is the whole point of NIRP – or negative interest rate policy – in the first place. Central banks want their cadre of local banks to engage in risky behavior. In order to nudge (shove) them in that direction, monetary policies are designed to punish risk-aversion. Banks that hold the safest and most liquid assets, such as JGB's or bank reserves on account, they will have to pay for the privilege.
Read Full Article »