TOKYO -- The international benchmark rate used for short-term yen financing has jumped to levels not seen in months as hopes for an interest rate cut in Japan fade while long-term rates rise in the U.S.
The three-month yen London Interbank Offered Rate stood at minus 0.004% as of Wednesday, a high last reached April 5. This spike follows the record low of minus 0.076% logged Nov. 28, and the bulk of the retrenchment occurred during mid-December and later.
One factor driving the surge is the waning expectation of a rate cut by the Bank of Japan. Speculation surrounding U.S. President-elect Donald Trump's economic stimulus package is weakening the yen and providing a lift to Japanese equities. This week, the BOJ slightly upgraded its economic outlook, leading market insiders to lower the odds of the Japanese policy rate going deeper into negative territory anytime soon.
Coupled with this trend are rising U.S. long-term Treasury yields. Japanese financial institutions are busy dumping foreign bonds, apparently selling those securities at a loss in the face of overwhelming paper losses.
When institutional investors purchase foreign debt, they often hedge against currency risks with transactions that swap dollar and yen Libor rates. "These transactions have swung to the inverse direction due to the selling of foreign bonds [by Japanese investors], which has led to the steep upsurge in the yen rate," said a source from a Japanese brokerage.
However, the domestic market may not be impacted by this pattern anytime soon. The three-month Tokyo Interbank Offered Rate has remained flat in positive territory after a slight dip in September. The rate is used as a benchmark by banks for setting corporate financing terms, but the cost of borrowing is not seen as rising for the time being.