Banks in Japan Brace for Change as BOJ Prepares to Get a New Chief

The Bank of Japan’s (BOJ) unconventional monetary easing policies has transformed the nation’s leaders in various aspects, from asset holdings to loan income. But as Governor Haruhiko Kuroda prepares to leave the central bank and make way for Kazuo Ueda as the new chief, there are doubts over whether the banking industry in Japan is bracing for a realignment.

Impact of Monetary Easing Policies

The “Kuroda Bazooka,” as the massive stimulus measures have been called, has driven down yields on Japanese government bonds, forcing banks to make significant changes to their traditional portfolios. Banks considered JGBs to have minimum default risks with the advantage of easy cash-out options in times of need. However, due to BOJ’s policies, banks had to find alternative sources to increase returns. Japan Post Bank, for instance, used to invest up to 80% of its assets in JGBs, but now it accounts for less than 20% and has increased its holdings in foreign bonds and other securities to nearly $572 billion, 35% of its entire portfolio.

Bloomberg Intelligence Senior Analyst Pri de Silva expects the central bank to fine-tune its bond yield policies or remove them altogether. However, attaining immediate results of luring Japanese banks back to JGBs is improbable.

Effect on Lending Income

The interest rates on loans have been low in Japan, with average new loan borrowings earning as little as 0.962% as of March 2013, as per BOJ data. The stimulus measures have added to the low payment of interest rates, with the current lending rate being even lower at 0.704%. Due to these lower rates, domestic net interest income for Japan’s three largest banks has fallen by nearly 30% over the last decade. This income from loans and bond holdings once made up most of their profits, which has experienced negative impacts such as a reduction in spreads and investment environments. Bank executives expect a boost in their domestic lending business once the BOJ raises the policy rates. However, unlike the rapid succession of rate hikes at the Federal Reserve, they anticipate a gentle, incremental approach.

Analysts believe that banks’ interest rates may remain stagnant or rise in the future since they have already fallen to very low levels.

Impact on Share Prices

The introduction of negative-rate policies in 2016 significantly impacted Japanese bank stocks during Kuroda’s tenure. However, when the BOJ made an unexpected tweak to its yield curve control last December, banking stocks saw a rise, suggesting the possibility of monetary tightening. The recent performance indicates the industry is on a rebound.

Related Facts

• The Bank of Japan has owned over 40% of Japanese government bonds since 2018 (source: Bloomberg).
• Japanese banks are struggling to bolster revenue; non-interest income currently makes up 30% of the revenue (source: Nikkei Asia).
• The BOJ has built ETF holdings worth $522 billion through purchases to bolster the stock market (source: Bloomberg).

Key Takeaway

With the Bank of Japan’s policies tailoring toward changes, the future for Japanese banks will see a realignment of their portfolios, lending income and profitability, and share prices. The impending end of Governor Haruhiko Kuroda’s reign at the BOJ signals likely monetary tightening; however, analysts anticipate an incremental approach.

Conclusion

The Bank of Japan’s monetary easing policies has significantly impacted the country’s banking industry. However, with a new governor at the helm soon, how things will change remains to be seen. Banks in Japan need to prepare themselves for these changes and cater to the new market. They must evaluate their portfolio and develop a plan to adapt to the new environment to remain competitive and profitable.