Fitch Says BOJ Measures Will Add Risks to Financial Institutions

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.

via Fitch Ratings

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza