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Fitch: BoJ's Actions Could Add to Risks Faced by Japanese Banks
October 3, 2016 / 2:07 AM / a year ago

Fitch: BoJ's Actions Could Add to Risks Faced by Japanese Banks

(The following statement was released by the rating agency) TOKYO/SINGAPORE, October 02 (Fitch) The Bank of Japan's (BoJ) latest measures are unlikely to ease pressure on bank profitability, but add to the risks faced by financial institutions - and could end up undermining efforts to boost the economy, says Fitch Ratings. The more complex these measures become, the greater the potential for unintended consequences, such as the impairment of the financial system's role in the transmission of monetary policy. Japanese bank profitability is being eroded by a number of factors, and the BOJ's measures in September came in recognition of the pressures brought about by negative interest rates. The weak domestic economy has kept loan demand subdued - which, on top of the fierce competition among financial institutions, has dragged on earnings. Moreover, the continued strengthening of the yen in the face of BoJ easing has added to the pressure on both banks and corporates in Japan. Banks' net interest margins (NIMs) have fallen steadily since 2010, most recently as a result of the BoJ's negative interest rate policy which has flattened the yield curve further. The average NIM of the three Japanese "mega banks" - MUFG, SMFG and Mizuho - has been on a downward trend for the last six years, and fell to just 0.9% in the fiscal year ending March 2016. The regional banks are likely to have been squeezed even more, since the mega banks benefit from broader diversification that makes them less sensitive to margin pressure. The BoJ at its September meeting tried to address yield-curve flattening to support banks' NIMs. Fitch feels the new framework is designed to pave the way for further policy rate cuts. It will target 10-year Japanese government bond (JGB) yields, which have been negative for much of this year but will now be kept close to 0%. We think it is unlikely that this form of yield-curve control will do much to boost bank profitability, since interest rates on only a relatively small proportion of bank lending are sensitive to 10-year bond yields. The majority of bank lending has an interest-rate renewal period of less than one year. In light of these factors, banks are unlikely to be spurred into lending more aggressively by the new policy framework, and the BoJ could be forced to make further alterations to try to boost the economy. We already expect the policy rate to be cut from -0.1% to -0.5% by end-2017, which would put additional pressure on banks' NIMs. The BoJ's steps into the unknown could even lead to banks becoming more cautious and bulking-up their absorption buffers with extra capital. Distortions in the bond market could be particularly dangerous for banks, which would be vulnerable to mark-to-market shocks if a normalisation of the bond market ever results in a sharp rise in yields. Regional banks look the most at risk, given that they have not reduced JGB holdings in the last few years, unlike the mega banks. Contacts: Kaori Nishizawa Director Financial Institutions +81 3 3288 2686 Fitch Ratings Japan Limited Kojimachi Crystal City East Wing 3rd Floor 4-8 Kojimachi, Chiyoda-Ku Tokyo, 102-0083 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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