Markets Exchanges,riskregulation,Transaction Banking,

Markets Exchanges,riskregulation,Transaction Banking,

Bank of Tokyo-Mitsubishi UFJ (BTMU) has signaled to the Finance Ministry that it intends to forfeit its status as a special participant in the bidding system for Japanese government bonds, a status that has afforded it advantageous conditions on bids.

The bank is expected to end its participation in the JGB Market Special Participants Scheme in July.

BTMU is considering the withdrawal amid recent lower yields on government bonds, which stem from the Bank of Japan’s implementation of a negative interest rate policy. The megabank also judged that the situation could result in unrealized losses if interest rates sharply increase and government bond prices drop further.

If other financial institutions follow BTMU’s lead, the government bond market could become unstable.

The ministry initiated the scheme under which the bank has enjoyed its JGB special participant status in 2004. It offered the benefit to major banks and securities firms to secure stable purchases of government bonds, which are issued in large volumes.

While special participants enjoy the privilege of exchanging opinions with the ministry during the bidding process, they are obliged to make a bid in every auction of at least 4 percent of the planned issue amount, and purchase a specified share of the amount. If BTMU abandons the status, it will become the first domestic financial institution to withdraw from the scheme.

BTMU’s move is attributed to the BOJ’s negative interest rate policy, which has lowered the prices of various types of Japanese government bonds regardless of how long they take to mature, resulting in purchasers having less incentive to hold the bonds. For example, the distribution yields of 10-year government bonds remain in the negative zone, meaning that, if held until maturity, they would cause a loss to the holder.

In concert with the government, major financial institutions have been supporting the national bond market. However, from the end of March 2013 — before the BOJ implemented quantitative and qualitative monetary easing policies — until the end of 2015, the total amount of government bonds held by domestic private financial institutions decreased by roughly 30 percent to about ¥230 trillion.

Re-disseminated by The Asian Banker