Japan Bond Rate Hits Less Than Zero

In the wackiest manifestation to date of Japan’s economic woes, the country’s super-low interest rates have fallen below zero on certain types of borrowing.

The yield on some six-month Japanese government treasury bills fell for a while Thursday to a minus .005%, according to bond traders and news reports from Tokyo.

In effect, that means people buying those bills were willing to pay the Japanese government a small fee to hold their money--because they didn’t want to take the risk of depositing it in one of Japan’s troubled banks, even though the bank would have paid them a small amount of interest.

To make matters even crazier, some of those investors were apparently willing to accept negative yields because Japanese banks were lending them yen at even lower negative interest rates.

It all adds up to a new low for a once mighty economy that has fallen into a historic slump since its inflated property and stock market “bubble” burst in the early 1990s, leaving Japanese banks saddled with hundreds of billions of dollars in loans that couldn’t be repaid.

Japan’s interest rates were already at rock bottom.

In an effort to revive economic growth, the Bank of Japan, the nation’s central bank, had lowered the benchmark interest rate to 0.5% and the overnight lending rate that banks charge one another to about 0.25%.

But the economy has failed to respond, in part because banks are so loaded with bad loans that they are reluctant to extend new credit at any rate.

What is happening now is a phenomenon rarely seen in credit markets, where below-zero returns are materializing amid a scramble by investors and lenders to find safe places to park their money.

Although slightly negative rates do not necessarily mean that the economy will worsen dramatically, they stem from fears that it might.

“It reflects the problems in the Japanese banking system,” said Jeff Bahrenburg, a global strategist at Merrill Lynch & Co. in New York.

“The government has put forward a plan for rehabilitating the banks, but there are a lot of questions about how well it will be implemented, and it falls short of calling for full disclosure [of problem loans]. So there’s a confidence factor that’s lacking. What this says is, the markets are skeptical about the plan.”