Borrowing From Japan May Be Marginally Costlier As BOJ Policy Rate Turns Positive

Borrowings from Japan will become slightly costlier as the Bank of Japan has raised interest rates, ending eight years of negative interest rate regime.

According to analysts, the rate hike is going to have a marginal impact on debt servicing and fresh funding from Japan.

Bank of Japan on Tuesday raised its short-term interest rates to around 0 per cent to 0.1% from -0.1%, ending Japan's negative rates regime in place since 2016.

'Bank of Japan's rate hike unlikely to affect our policy decision. But for Indian companies borrowing overseas will become more expensive. But still would be cheaper than other markets. Hence will not affect quantum of borrowing,' Bank of Baroda Chief Economist Madan Sabnavis told PTI.

BoJ’s rate policy is unlikely to have a significant impact on markets in India as the hike is small which is not significant enough to move the needle on capital flows, Geojit Financial Services Chief Investment Strategist V K Vijayakumar said.

Also, Japan is not a significant source of foreign portfolio flows to India, he said.

'The impact on debt servicing and infrastructure funding, too, will be very marginal. The situation will change only if BoJ continues to raise rates, which is unlikely. The fact that the Yen declined after the rate hike, instead of rising, is a signal from the currency market that the impact will be negligible,' Vijayakumar added.

BDO India partners Financial Services Neeraj Ssinnha said the raising of the interest rate will have a marginal impact, at best, on the Indian borrowers at this point of time as people who have borrowed in Yen typically cover the position by hedging.

'The borrowing of infrastructure loans in Yen will get slightly expensive if the repayment is also expected in Yen. However, this action sends a signal to borrowers to remain vigilant of any future moves,' Ssinnha said.

According to a report by State Bank of India’s Economic Research Department, the BoJ also announced the abolition of its radical yield curve control (YCC) policy for 10-year Japanese government bonds, which the central bank has employed to target longer-term interest rates by buying and selling bonds as necessary in a fight to boost persistently low inflation.

In the roughly 8 trillion dollar JGB market, BoJ has had an overwhelming share (47.1 per cent as of June 2023 against 43.7 per cent pre-pandemic in December 2019), it said.

The volatility in the yen witnessed since 2021 has earned the local currency an epithet of weak currency, dampening the image of the third largest economy even as its investments in recent years have incrementally been channelled towards Australia/neighbouring Asian economies, the report said.

Additionally, the holdings of BoJ in the US treasury at about USD 1.14 trillion may find some way back home to benefit from the expected rise in benchmark yields, though not of materially significant levels as of now with constantly sliding yen ensuring carry trades by leveraged funds have peaked, their bets against the yen rising to the most in six years, it said.

That way, the yen could witness strengthening in days to come even if it hampers the Japanese export competitiveness and gives less say/stake in the rejigged supply chains with the global economy accentuated by AI-led innovations, it added.