TOKYO -- The influx of cash into Japan's biggest banks and their parking of such money at the Bank of Japan are putting large commercial banks on the verge of having to pay the central bank interest on deposits there for the first time in two years.
Looking to encourage capital liquidity, the BOJ implemented the negative interest rate policy in February 2016. Financial institutions are charged 0.1% on excessive current deposits held at the central bank.
Apart from in the initial phase, the large banks have avoided paying the negative rate. This is because the BOJ divides the banks' balances into three tiers, applying positive, zero and negative interest rates to each one. Only excessive deposits are subject to the 0.1% negative interest rate.
But big banks are seeing more money pour into their safes as corporate earnings improve in Japan. And with this, deposits at the BOJ are growing as well.
The balance on deposits at major Japanese banks came to 370 trillion yen ($3.32 trillion) in May, up 57 trillion yen since the launch of the negative-rate policy. The numbers come from megabanks MUFG Bank, Mizuho Bank and Sumitomo Mitsui Banking Corp., as well as Resona Bank and Saitama Resona Bank.
A senior executive at a major bank sounds the alarm on the influx, warning that "if yen deposits continue to grow at this pace, negative interest rates could be applied sometime within this fiscal year."
By themselves, the numbers indicate healthy corporate earnings. But the money seems to be flowing disproportionately to bigger banks. While deposits at first- and second-tier regional banks have grown 7% since negative rates were introduced, they have jumped 18% at major banks during the same period.
Contrary to the hopes of the government and the BOJ, companies are choosing to keep funds on hand as deposits rather than directing them toward capital investment, said an executive at another major bank.
In the nearly two decades since the zero-rate policy went into effect, it has become increasingly challenging to push corporations to invest with modest interest rate cuts. The 2008 global financial crisis has only compounded the issue. "Because memories of the financial crunch are very fresh, companies are rushing toward safe measures," an insider said.
Corporate deposits have grown to an all-time high of 247 trillion yen at the end of March, BOJ data shows -- up 13% over two years. Activity is especially concentrated at large banks, which have struck business arrangements with blue chips.
Approximately 25 trillion yen in bank deposits qualified for the negative rate this June, according to the BOJ. Simple math suggests that the annual negative-rate burden for the banking industry is 25 billion yen ($225 million), which would hurt already-shrinking earnings.
But the entire burden has fallen on regional banks, as well as Japan Post Bank, Norinchukin Bank and similar financials. The five largest banks have only paid the BOJ deposit rate in February, March and May of 2016. They were able to skate free thanks to the 0% tier, the buffer zone the central bank can expand if needed.
Major banks have placed more than 100 trillion yen in current-account deposits at the BOJ, a figure that constantly scales new heights. Yet the big banks have managed to avoid the negative rate, to the consternation of smaller financial groups.
"It could be that regional banks, looking to avoid paying the negative rate, are urging client companies to place deposits at major banks instead of with themselves," an executive at a large bank said.