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Japan's money markets gird for end of negative rates

A view of the skyline at Shinjuku district during sunset in Tokyo

By Junko Fujita and Tom Westbrook

TOKYO/SINGAPORE (Reuters) - Speculators betting on a historic monetary policy shift in Japan expect money markets will be upended by potential new deposit rules and are crowding into bets against short-dated bonds.

Yields on one-year Japanese treasury bills, which went sideways through 2023, are up a relatively sharp eight basis points in 2024 to a near almost decade high of 0.067%, under pressure from short-sellers. Six-month yields, negative for eight years, leapt above zero last week.

The positioning is a bet that the Bank of Japan overhauls a tiered deposit programme that charges financial institutions a discouraging -0.1% rate on excess reserves, and replaces it with a positive overnight rate. Investors assume banks will rush to dump short-dated paper and keep excess cash at the BOJ.


"The demand/supply situation on the short-end JGB (would) dramatically change," said Keita Matsumoto, head of financial institution sales and solutions at Citigroup Global Markets Japan.

Under its yield curve control (YCC) policy, the BOJ guides short-term interest rates around -0.1% and has gradually eased its grip on the 10-year bond yield with a current soft cap at 1%.

While investors have for months speculated the BOJ will tighten policy, this time they expect it will lift overnight rates to zero or just above zero, rather than changing settings for longer term yields.

The BOJ's negative rate framework penalises financial firms for parking excess reserves with the central bank. Their balances are split into three tiers, with required reserves earning 0.1% and excess balances getting zero interest or a negative 0.1%.

Total reserve balances at the BOJ were roughly 536.75 trillion yen ($3.63 trillion) in January.

Some of the fiercest bets on money flowing from shorter money market debt into these reserve accounts are in the rates futures market.

Futures contracts pegged to the BOJ's overnight call rate TONA maturing in June were last quoted at 100.01, implying the overnight call rate will be almost at zero. Those maturing in September next year indicate the overnight call would be much higher at 0.0575%.

The call rate was quoted at -0.011% on Thursday.

"The obvious difference in the way the market hedges for rising rates is that now their focus is on the timing of the end of the negative rates," said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.

The one-month interest rate swap has also turned positive in the past week, rising as high as 0.04%.

"The three-month futures prices have already priced in investors' bet that the BOJ will end its negative rate soon," said Izuru Kato, chief economist at Totan Research.

Over the past eight months, investors have locked horns with the BOJ, frequently shorting benchmark 10-year bonds to push yields above the cap and forcing the central bank to hike borrowing costs on those bonds to deter short-selling.

Upon ending negative rates, the BOJ is also likely to ditch YCC and set the overnight call rate as its new policy target, Reuters reported this week.

The two-year JGB yield, which is highly sensitive to short-term rates, hit a 13-year high earlier this week, but the 10-year JGB yield is some distance from its 1% cap.

The BOJ is committed to intervene if the yield exceeds that level.

($1 = 147.8000 yen)

(Reporting by Junko Fujita; Editing by Vidya Ranganathan and Sam Holmes)