Japan Banks Accelerating Efforts to Shift Away from Yen Libor

Economy

Tokyo, July 12 (Jiji Press)--Major Japanese banks are accelerating their preparations for the abolition at the end of 2021 of the yen-denominated Libor rates, or London Interbank Offered Rates, which they have been using as a benchmark for setting loan interest rates.

As the combined balance of their loans pegged to yen-denominated Libor rates, including derivative products, stands as high as over 2,000 trillion yen, the amount of work facing the banks for switching to alternative reference rates is huge and failures to end the work within this year are feared to put the financial market into an unexpected confusion, including by forcing borrower companies to default on their loans.

Libor has been the primary benchmark for interest rates for a vast amount of financial contracts around the world. When financial institutions extend loans, they set interest rates by multiplying Libor by percentages that are determined by the creditworthiness of borrower companies.

Due to a rate manipulation scandal, it has been decided that Libor will be abolished, and the release of yen-denominated Libor rates will be terminated at the end of this year. In case the procedures to transition to other reference rates are not completed by year-end, the amount of interest payment cannot be fixed for Libor-pegged loans and delays may be caused for interest payment by borrower companies.

Delayed shift away from Libor “may cause confusion to not only respective deals but also the whole market,” Bank of Japan Deputy Governor Masayoshi Amamiya warned, stressing the need to transition to alternative reference rates by the end of the year.

[Copyright The Jiji Press, Ltd.]

Jiji Press