Monetary policy will be normalized at some point, but structural factors won’t change as Japan’s population will continue to decline  and the number of companies will keep falling.
Monetary policy will be normalized at some point, but structural factors won’t change as Japan’s population will continue to decline  and the number of companies will keep falling.

Low Rates Hurting Banks

Bank of Japan warns that banks may see profitability fall further if monetary policy remains ultra-loose and thus seek new revenue sources

Low Rates Hurting Banks

Prolonged ultra-easy monetary policy is weighing heavily on Japanese bank profits but financial institutions should not expect business conditions to brighten dramatically even after the central bank raises interest rates, a senior Bank of Japan official said.
Many regional banks could suffer losses in the long run as intensifying competition forces them to cut lending rates to attract borrowers in a shrinking domestic market, said BoJ Executive Director Atsushi Miyanoya, Reuters reported.
 “The BoJ’s monetary policy, including negative interest rates, undoubtedly has a significant impact on bank profits,” said Miyanoya, who oversees a division in charge of monitoring Japan’s banking system.
“Even when monetary policy is eventually normalized, banks shouldn’t expect profits to return to levels before ultra-easy policy was put in place,” he told Reuters on Dec. 22.
After three years of heavy asset buying failed to fire up inflation, the BoJ last year adopted negative interest rates and a pledge to guide 10-year bond yields around zero percent.
Miyanoya said the BoJ’s policy has not excessively hurt bank profits yet, countering criticism from the financial sector that the costs of monetary stimulus were exceeding the benefits.
But he warned that banks may see profitability fall further if monetary policy remains ultra-loose, and called on regional banks to seek new revenue sources instead of meeting intensifying competition just by cutting lending rates.
“In the medium- to long-term, there’s a risk many financial institutions may record net losses simultaneously. We can’t deny the risk financial intermediation may not function properly at the same time,” Miyanoya said.
“With the economy in good shape and banks having sufficient capital, now is the time to act,” he said. “Mergers and consolidation are among options to improve profitability and efficiency.”
Downward Pressures
Years of crisis-mode stimulus have squeezed bank margins in many advanced nations. The problem is more acute in Japan, where more than 100 regional banks compete in an overcrowded market that is shrinking amid an aging population.
An industry watchdog said in October that more than half of Japan’s regional banks lost money on their core business in the year ended March 2017.
Regional banks’ plight has piled pressure on the BoJ to focus on the demerits of its policy, though Governor Haruhiko Kuroda said he saw no need to dial back stimulus now.
Even when the BoJ withdraws stimulus, banks may not see margins improve sharply due to severe competition, Miyanoya said.
“It’s true our monetary policy is exerting downward pressure on banks’ profits, but that’s not the whole story,” Miyanoya said.
“Monetary policy will be normalized at some point. But structural factors won’t change. Japan’s population will continue to decline and the number of companies will keep falling.”

JGBs Tick Up
Japanese government bond prices edged up a tad on Monday as the Bank of Japan's bond-buying operation underscored limited selling interest ahead of the year-end.
The 10-year JGB yield dipped 0.5 basis point to 0.040% while the 20-year JGB yield also slipped 0.5 basis point to 0.560%. The 30-year JGB yield was flat at 0.815%.
The BoJ on Monday maintained the size of its buying in JGBs with five to 10 years, 10 to 25 years, and more than 25 years to maturity.
 In all of the three operations, the average yield at which the BoJ bought was lower than the previous close, reflecting limited supply compared with demand.
The price of the benchmark 10-year JGB futures ticked up 0.09 point to 150.87, paring most of their losses to a seven-week low of 150.53 last week.
Their trading volume was paltry, at 9,626 contracts, the lowest in more than four months with many market players away for year-end holidays.

Need for Fiscal Consolidation
The record ¥97.7 trillion ($862.7 billion) general account budget for fiscal 2018, approved by Prime Minister Shinzo Abe’s Cabinet last week, features insufficient efforts to put the nation on a steady path for fiscal consolidation.
While the government expects tax revenue next year to recover to the levels at the height of the early 1990s bubble boom on the strength of continued growth of the economy and robust corporate earnings, a reduction in its dependency on debt to finance its spending was kept to a minimum as not enough measures were taken to curb spending.
Following its recent decision to shelve the target of achieving a primary balance surplus by fiscal 2020, the Abe administration is urged to quickly come up with a credible scenario for fiscal rehabilitation.


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