TOKYO: 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.
“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 normalised, 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 per cent.
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.”
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 ageing 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.