March 7, 2019 / 3:34 AM / 17 days ago

Breakingviews - Mizuho’s harsh medicine gives taste of Japan ills

Mizuho Financial Group's Chief Executive Officer Tatsufumi Sakai attends an interview with Reuters at the company's headquarters in Tokyo, Japan August 20, 2018. Picture taken August 20, 2018. REUTERS/Toru Hanai

HONG KONG (Reuters Breakingviews) - Mizuho’s harsh medicine gives investors a taste of Japanese banking ills. The country’s second-biggest lender by assets took a $6 billion hit and slashed its annual profit forecast on Wednesday by 86 percent. Losses on dozy rural branches and duff offshore trades are symptomatic of ultra-loose monetary policy. New rules to ease consolidation should at least offer some relief.

    Local financial institutions have long suffered under the central bank’s unconventional negative interest rate regime. Unable or unwilling to pass on higher costs of holding cash to their corporate clients, they have watched margins erode. Many are chasing higher returns in overseas markets to compensate.  Mizuho is overhauling its securities portfolio in part because of “past investments in foreign bonds,” suggesting how fraught such efforts can be.

    Whopping impairments and other charges make clear why just a few days earlier Mizuho Chief Executive Koji Fujiwara publicly called on the Bank of Japan to consider the “negative side effects” of monetary easing. He argues that financial stability should trump the 2 percent inflation target. In the unstable environment, however, BOJ Governor Haruhiko Kuroda’s hands are tied. A Reuters report last July that policy normalisation was under discussion sent Japanese stock indexes into a tailspin.

    Kuroda is not unsympathetic to the plight at banks, which trade at parlous discounts to their book value, but has signaled he thinks cost savings can compensate. In Japan, the rural population is aging and shrinking and yet hosts some 100 regional banks. Consolidation is the obvious solution, and indeed most of Mizuho’s latest loss comes from one-time charges to close and rethink branches outside cities.

    Competition laws which have hobbled the process may soon be relaxed. Tokyo unveiled plans this week to create exemptions to anti-monopoly rules for lenders in small towns. If enacted, it could enable a wave of deals that help reduce expenses.

    The banks also can help themselves, too. Instead of playing offshore bond markets, they could use technology to cut headcount and reduce cash transactions. They might also finally consider passing on the cost of negative interest rates to their corporate clients via fees. Additional spoonfuls of sugar would help this tough monetary medicine go down.

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