MNI BRIEF: BOJ Eyes Banks' Dollar Funding Costs As Rates Rise

The Bank of Japan is monitoring the risk that further hikes and a prolonged period of high U.S. rates will increase U.S. dollar funding costs for Japanese banks in the U.S. and make it difficult for them to raise funds, MNI understands.

Despite the Fed’s rapid and large rate hikes, Japanese banks have not faced dollar-funding problems as they can raise necessary funds if they are prepared to pay the higher cost to access U.S. dollar-funding, the BOJ views. (See MNI POLICY: BOJ Wary of Slow China Recovery, Fed Hike Impact)

But banks’ dollar-funding will depend on how much U.S. interest rates rise and how long high interest rates continue as this will prompt banks to raise deposit rates, which will squeeze banks’ profits, the BOJ warns.

Japanese banks, if necessary, can raise dollar liquidity through BOJ dollar-providing operations.

The BOJ’s Financial System Report said, “Major banks have attempted to secure relatively sticky deposits by raising deposit interest rates. Moreover, despite the rise in dollar funding premiums, major banks have been increasing long-term funding using currency swaps.”

“With global financial conditions tightening, attention needs to be paid to the possibility of an unexpected surge in foreign currency funding needs and to the dollar funding market liquidity in such a situation,” the report said.