Implode-o-Meter News - Negative Rates Prompt Japan Banks to Seek Protection Via Derivatives

Japanese banks are getting hurt as the negative-rate policy compresses their lending margins, with the top-three firms including Mitsubishi UFJ Financial Group Inc. forecasting this month that net income will fall a combined 5.2 percent in the year started April 1. The BOJ's radical stimulus has already dragged yields on more than 70 percent of Japanese government bonds to below zero, meaning that investors will have to effectively pay a fee to hold such debt to maturity.
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Companies that borrow at floating rates may also be able to use floor options to ensure that interest-rate swaps they use to hedge against rising rates don't end up costing them due to negative rates, Takahashi said. Actual trades of such derivatives are still not that common because the contracts are expensive to buy now, he said.
"It will be hard to price these options unless we get more liquidity," said Tateo Komatsu, a deputy general manager of global markets at Sumitomo Mitsui Trust Bank Ltd. "It will take time for the market to get used to minus rates."

There's no free lunch, so it's not exactly clear how these options will spare banks the pain. After all, options cost something.

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Negative Rates Prompt Japan Banks to Seek Protection Via Derivatives