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Economy

As yields turn negative, institutions dread taking customers below zero

TOKYO -- The Bank of Japan wants to beat deflation so badly that it is charging commercial banks for holding their money, but it has gotten little love for this policy from financial institutions that deal with customers.

Negative interest rates have made the search for yield all the more frantic. Sumitomo Mitsui Asset Management recently closed a stock fund to new buying after it had attracted nearly 50 billion yen ($456 million) from regional banks, pension funds and other yield-hungry institutional investors.

The fund's attraction lies in its consistantly high returns. It boasts an annualized yield of more than 10% since its inception and, according to its manger, has never logged a losing quarter.

Japanese money is also heading overseas in hopes of better returns. Goldman Sachs markets a product called private credit to Japanese insurers. Investors enter into syndicated loans with Goldman to B-rated borrowers that the Wall Street bank has screened, such as U.S. and European buyout funds.

Yields are high, to the extent that liquidity is low, Goldman's Omar Chaudhary said on a recent visit to Japan. Another benefit for the volatility conscious is that these investments need not be marked to market, Chaudhary said.

Hitting the wall

Thursday marks 100 days since the BOJ introduced negative interest rates. In a question-and-answer-style primer on the policy, the bank tells visitors to its website that negative interest rates confer an advantage "when you want to build a home or when companies build a factory or store."

But to the BOJ's chagrin, business investment has not quickened. Meanwhile, with the yield on 10-year Japanese government bonds hovering around negative 0.1%, institutions are taking decent returns where they can find them.

Nippon Life Insurance plans to invest 40 billion yen in overseas infrastructure. "When it comes to government bonds, we buy only the minimum needed to ensure liquidity," said Kazuo Sato, head of finance and investment planning.

Insurers and pension funds have committed to delivering a positive return to their policyholders and savers, as have banks to their depositors. The Accounting Standards Board of Japan allows negative discount rates to be used in calculating future pension obligations, but it also allows a zero rate.

Financial institutions are reluctant to impose negative yields on their customers for fear of incurring a backlash. These fiduciaries thus hit a wall at zero that forces them to fulfill their obligations to provide a positive return even if their own earnings suffer. The prospect of rates moving further below zero poses the fear that earnings will continue to deteriorate indefinitely, says an equity sales manager at a European brokerage.

Now that earnings season has wound down, attention has turned to Federal Reserve policymakers' June meeting and the BOJ's subsequent rate-setting meeting. Stock market participants are expecting a dose of fast-acting monetary stimulus from the BOJ, such as an increase in purchases of exchange-traded funds, rather than a doubling down on negative rates.

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