Japanese lenders are rushing to cut deposit rates before the start of the Bank of Japan's negative interest rates on Tuesday, following sharp falls in benchmark bond yields.
Sumitomo Mitsui Banking Corp said it cut the interest rate on ordinary deposits to 0.001% a year, from 0.02%, the bank's first reduction on ordinary deposits since September 2010, Reuters reported.
The rate, effective from Tuesday, means a depositor will be paid an annual interest of 100 yen ($0.88) on 10 million yen ($88,000).
The bank, a core unit of Japan's third-largest lender Sumitomo Mitsui Financial Group, and its biggest rivals Bank of Tokyo-Mitsubishi UFJ and Mizuho Bank have already cut rates on time deposits, though those remain in positive territory.
But bank executives said further cuts in loan interest rates are unlikely to give a boost to loan demand.
"Our corporate clients are saying the BOJ's negative interest rates won't lead to an increase in capital spending," said a senior executive at one of the megabanks.
"With global markets this volatile, they are taking wait-and-see stance. One client told me his company is even putting a project on hold to rebuild its own office building," said the person, who declined to be identified given the sensitivity of the matter.
"On a macro level, businesses and households have surplus funds. Further falls in interest rates are unlikely to lead to a surge in loan demand," said Ryoji Yoshizawa, director at Standard & Poor's in Tokyo.
Simply put, banks make money from the gap between what they pay for deposits and what they receive from loans.
The Bank of Japan unexpectedly cut a benchmark interest rate below zero late last month—effectively charging financial institutions which park money with it—as it struggles to the stimulate the economy.
Loan Interest Rates
But even before the introduction of negative interest rates, banks have little more room to cut deposit rates, while loan interest rates are likely to fall further amid tepid demand.
Bank officials said it is difficult to charge fees or negative interest rates on clients' deposits given a possible public backlash. A massive withdrawal of cash from the banking system is also a possibility.
Short of such measures, major banks are asking some large big corporate clients to refrain from making large deposits at their banks, people with direct knowledge of the matter said.
GDP Shrinking Again
The country's GDP shrank by 1.4% in the last three months of 2015, the government said Monday, underlining the challenges for officials who have been trying for years to drag the world's third-largest economy out of stagnation, CNNMoney reported.
The gloomy number comes at a turbulent time for Japanese financial markets. Stocks in Tokyo plunged more than 11% last week as the country's currency, the yen, soared to its highest level against the dollar since late 2014.
A strong yen hurts exporters by making goods produced in Japan more expensive overseas. It also holds back inflation—a big problem in Japan, which has struggled with falling prices over decades.
The Japanese government and central bank have been trying to stimulate growth and inflation, but the moves have failed to have a lasting impact. The economy continues to lurch between expansion and contraction.
The Bank of Japan stepped up its efforts in late January, surprising investors by announcing negative interest rates for the first time. But that only resulted in a brief weakening of the yen before the currency climbed sharply again.
Despite the ugly GDP numbers, stocks in Tokyo rose 7.2% on Monday, following strong gains in European and US markets on Friday. Stocks may also have been helped by a fall in the yen against the dollar.
Consumer Spending
Amid the global market volatility, Japan is wrestling with difficulties on the home front.
A slump in consumer spending dragged the economy down in the fourth quarter, according to the government data.
Demand is expected to strengthen later this year as consumers go on shopping sprees to beat an increase in sales tax next year, according to Marcel Thieliant, senior Japan economist at Capital Economics.
But any gains are likely to be "short-lived," he warned, "as activity will almost certainly slump once the tax has been raised."
