From Reuters via Asia Times:
The Bank of Japan may have run into an unexpected obstacle as it considers expanding its extraordinary stimulus programme as soon as next week — the wrath of the country’s powerful but typically compliant banks over pushing interest rates deeper into negative territory.
Bond traders were stunned this week when Bank of Tokyo-Mitsubishi UFJ (BTMU), one of the nation’s three megabanks, said it was giving up its status as a primary dealer of Japanese government bonds (JGBs), though the news did not immediately affect prices.
The move is seen as the clearest and most public display yet of growing distaste over the BOJ’s negative rate policy by one of the biggest players in the JGB market, shocking policymakers accustomed to seeing financial institutions happily finance Japan’s huge public debt.
Sources familiar with the BOJ’s thinking say BTMU’s decision may also complicate any eventual tapering of the BOJ’s massive JGB purchases, and may force the central bank to continue printing money for longer than it wants.
“It’s true the hurdle for deepening negative rates may have become higher than other steps like topping up asset purchases,” one of the sources said.
“Even expanding stimulus could be difficult,” another source said on condition of anonymity.
Some BOJ officials are concerned enough over signs of stress in the JGB market to speak up, including Deputy Governor Hiroshi Nakaso, who said on Thursday he was mindful of criticism that negative rates were causing “great damage” to market liquidity.
The episode comes ahead of a BOJ policy rate review next week. While most economists polled by Reuters expect the BOJ to keep policy unchanged, a majority believe it will ease again in July, either by cutting rates more deeply into negative territory or buying even more bonds and riskier assets, or a combination of both.
EXIT HURDLE RISES
Officials at BTMU, a core unit of Mitsubishi UFJ Financial Group <8306 .t="">, unofficially say they are quitting as a primary dealer because it does not make economic sense to meet the requirement to keep buying a certain amount of JGBs in each auction, when bonds are carrying negative yields. The benchmark 10-year yield hit a fresh record low of minus 0.155 percent on Friday....MORE8306>