By Takahiko Wada and Leika Kihara

TOKYO (Reuters – A spike in deposits due to the huge cash payouts by the Japanese government is causing some Japanese lenders problems. It complicates the efforts of the central bank for reducing the adverse effects from its negative interest-rate policy.

Last month, MUFG Bank, a leading industry bank was subject to negative interest rates for deposits parked at the Bank of Japan – this was the first such charge since 2016.

This was an unfortunate consequence of steady increases in deposits. Households and businesses saved money to weather the effects of the pandemic.

As of January 2019, the balance at major banks including MUFG had reached 446 trillion yen (or 3.87 trillion dollars). This is 14% more than pre-pandemic levels of early 2020.

The government’s plans to pay out another 2 trillion Japanese yen to families with children could cause deposits to rise even more.

The case of MUFG illustrates the extent to which mega-banks have tried for years to avoid paying interest. They may have moved money from BOJ reserves into investments and loans.

“The deposits were over a specified threshold. The money market has limits. MUFG also stated that it is not possible to manage funds in a manner that is economically sound. When questioned why the BOJ decided to retain as much of its funds, MUFG responded in writing to Reuters.

The BOJ charges 0.1% interest to excess reserves that financial institutions have deposited with it in an effort to reduce borrowing costs and encourage lenders to lend money, rather than sitting on cash piles.

In order to minimize the negative impact that ultra-low rates have on bank profits, the BOJ has taken measures to limit the amount of reserves.

The charge was only applied to 300 billion yen of MUFG reserves over a 1-month period from Jan. 15 through January 15, which is a small amount considering the combined deposit at BOJ by mega-banks that total about 186 trillion yen.

Major banks are also offered a 0.1% interest bonus by the BOJ for maintaining a layer of reserve deposits. It is believed that the annual sum received by all banks amounts to approximately 950 trillion yen.

Masazumi Wakatabe (BoJ Deputy Governor) stated last week that it was not a sign of the potential demise of our negative-rate policy materializing. This counters the belief that the case of MUFG highlighted the downsides to massive stimulus.

However, the BOJ’s episode arrives at a sensitive time. It is trying to control market speculation for a near-term policy adjustment as other central banks look to exit ultra-low interest rates.

A source who has direct knowledge about BOJ’s dealings with private lenders said that “Financial Institutions are still upset by the BOJ’s Negative Rate Policy.” They want a steeper yield curve to increase their margin.

($1 = 115.3600 yen)