The Bank of Japan has begun paying banks for the privilege of lending them cash in a sign the central bank is reaching the limits of its power to reflate the economy, although it may soon be forced to pump yet more money into the financial system.
Negative yields are more than a footnote in the BOJ's unprecedented "quantitative and qualitative easing" (QQE) policy. They show that Governor Haruhiko Kuroda's 18-month-old monetary experiment is struggling barely halfway to its 2 percent inflation goal.
"Practically, this is not a policy that you can maintain for a long time," said Tomohiro Miyasaka, fixed-income strategist at Credit Suisse. "The BOJ is absorbing bills and bonds from markets so much that one day there could be no bills and bonds left to buy."
The BOJ already buys most of the government's issuance of debt. Last week, it paid financial institutions more for three-month, and then six-month, government debt than it will receive when the bills are redeemed, traders said. This force-feeding of cash into the banking system pushed the three-month yield as low as -0.015 percent and the six-month to -0.020 percent.
Banks holding debt to dress up their quarter-ending accounts partly explains the swing in rates. But the fact that a seasonal factor can have such an impact shows just how little appetite there is for the cash the central bank is injecting into the economy, traders said.
The anomaly may spread to one-year bills as soon as Wednesday, when a government debt auction is held.
"I think the one-year bill yield could fall below zero, given tight demand in markets. The BOJ will have to keep buying short-term bills," said Miyasaka, to meet its cash-infusion targets.
Debt specialists say it is highly unlikely negative rates could spread to ordinary savers' bank deposits, but the BOJ's pursuit of assets at any price could feed criticism it is subsidizing banks and bankrolling the government's massive debt.