When earning nothing is a blessing
Pension obligations loom in an era of low yields
JO KAWAKAMI, Nikkei staff writer
TOKYO -- It was the ultimate lowball bid. During an auction in September to raise funds for the Japan Oil, Gas and Metals National Corp., the winning bidder agreed to loan the money with a 0% interest rate. "Even zero is a blessing," an executive of a major bank said of the auction.
This is life in the upside-down world of negative interest rates, introduced nearly two years ago by the Bank of Japan in hopes of stimulating growth. For banks, which suffer losses by keeping deposits at the BOJ, it makes sense to loan money to an enterprise like Jogmec, an independent administrative agency backed by government guarantees.
Europe has also seen positive yields disappear. Short-term government bonds have negative yields in countries that suffered from debt crises, such as Spain and Ireland, as well as in countries with high credit ratings, including Switzerland and Germany.
In the U.S., long-term interest rates remain low, at around the middle of the 2% range. Jerome Powell, President Donald Trump's choice to succeed Janet Yellen as Federal Reserve Board chairman next spring, is unlikely to raise interest rates quickly. After its December rate rise, the Fed is expected to pursue a gradual pace of increases. Morgan Stanley analysts recently forecast that there will be three rate hikes in 2018 and two in 2019.
Today, the difference in yield between the 10-year and two-year Treasury notes is less than 1 percentage point. There are no signs that the flat yield curve will slope upward.
On the hunt
The surplus of money and ultralow interest rates have driven a worldwide hunt for yield. A 100-year government bond issued in June by Argentina attracted 3.5 times the expected number of bidders and was sold out instantly. These eager investors apparently were willing to forget the country's ignoble history of eight defaults in the past 200 years in order to own bonds with a high yield of over 7%.
Low rates have also prompted a worldwide property boom. Hong Kong's stratospheric property prices set another milestone in November, when an unidentified buyer paid 560 million Hong Kong dollars ($71.6 million) for a 4,242-sq.-foot luxury apartment in the city's upscale Peak district, according to local news reports. That translates to HK$132,000 per square foot -- a record in Asia for the most expensive private residential property as measured by square foot.
In hot global property markets, many of the buyers of new condos are from foreign countries, especially China. But many are buying to invest, not live -- a phenomenon also seen in Vancouver, Manhattan and London.
Meanwhile, global outstanding assets under management totaled $70 trillion at the end of 2016. The amount was up 50% from 2007, due to growing pension assets across the world and rising incomes in emerging countries.
In 2050, eight countries, including Japan, the U.S. and China, will have a total shortfall of $400 trillion in savings needed after retirement. The World Economic Forum made this estimate assuming further longevity and the current retirement ages of 60-70. In the U.S., bond investment yields are expected to decline from the past average of 3.6% in real terms to 0.15% in the future, and the declining yields will increase the savings shortfall. Reviewing the pension and employment systems is urgently needed across the world.
The more money consumers put into asset investments to save for a long retirement, the more yields will fall. Pension money, which is rising on an unprecedented scale, may be pursuing a mirage.
Additional reporting by Nikkei staff writer Koji Okuda and Nikkei Asian Review deputy editor Dean Napolitano