viernes, 23 de agosto de 2019

viernes, agosto 23, 2019
Japanese Banks Are Circling the Drain

Three decades of structural pressure from falling interest rates can no longer be escaped

By Mike Bird

After years of low and now negative interest rates, many Japanese banks are circling the drain. Photo: Photo Illustration by Emil Lendof/The Wall Street Journal; Photos: iStock 


Banking in a country where almost nobody defaults sounds easy. For Japan’s lenders, it is anything but.

After almost three decades of near-zero, zero, and now negative interest-rate policies, Tokyo has pushed its banking system to its limit.

The country’s smaller lenders in particular are facing an existential threat to their business models. Located in aging and shrinking prefectures, they lack the ability to increase fee-related incomes that major banks can raise.

Japan has too many banks, and consolidating them into larger players will buy time. But without a wholesale shift in the way it approaches its economic stimulus policies, the banking system will remain under constant pressure.



Since March 2016, shortly after the country’s negative interest rate policy was introduced, net income at major banks has declined by a fifth. At regional banks, the decline has been steeper: Net income is a third below its level three years ago.

Practically all of Japan’s regional banks have seen their share prices fall in the past 12 months. More than half have had declines exceeding 30%. They have underperformed the broader Japanese market for decades.

At the beginning of 1995, just before the Bank of Japancut its benchmark policy rate to 0.5%, loans by commercial banks with interest rates of below 1% were practically nonexistent. Over 90% of outstanding loans carried an interest rate of 3% or more. Today, 90% of Japanese loans carry an interest rate of less than 2%. The fastest-growing segment is the paltry 0.25% to 0.5% bracket, which has expanded by almost a 10th in the past year.

The interest offered to Japanese depositors, however, shifted much more quickly to very nearly zero. The upshot of this is that profitability held up for a while but now the 1.5 percentage point spread between interest rates on new loans and new time deposits that prevailed in the 1990s has declined to just 0.5 percentage point. Even with the country’s rock-bottom default rates, the resulting profits simply aren’t sufficient to run a bank.



Some of Japan’s major banks have found an apparent workaround, but one with its own serious risks. Those with the expertise and ability to do so have ventured overseas, acquiring assets and lending in currencies without such low interest rates.

Norinchukin Bank, a Japanese cooperative serving farmers and fishermen, has become a leviathan in the market for U.S. and European collateralized loan obligations, investment vehicles that buy up loans to junk-rated companies. Mitsubishi UFJ Financial Group ,Inc. reported foreign-currency assets of 111.158 trillion yen ($1.049 trillion) in the year to March, a figure that has risen more than 100% in the last 10 years, three times faster than its domestic assets.

Roaming abroad is more difficult for smaller banks, and it would be unwise even if it was possible: Bank for International Settlements research has demonstrated that banks without local operations and local funding were least resilient against shocks when operating overseas.

The precarious position of Japanese banks isn’t an example of negative interest rates failing but of them working perfectly well. Central bankers often complain about problems with monetary transmission—often a byword for banks not passing on interest-rate cuts—but Japan’s have done so.


Moving beyond the current dangerous impasse will require consolidation. The country has too many banks and too many rules that prevent them from merging. According to the Nomura Research Institute, of the 11 regional banks created by mergers in the past two decades, 10 reduced their operating expenses and nine became more efficient by downsizing.

Critics of Japan’s monetary policy would be wrong to imagine that higher interest rates would help either. As with lower rates, the change would take years to filter through, during which time defaults would rise and economic growth would stall.

On their current path, the future looks decidedly bleak. Atrophying profitability is likely to result in more frauds like that of Suruga Bank Ltd., a one-time regional banking star brought low by a document-falsification scandal relating to real-estate loans. If the economy takes a turn for the worse, any rise in bad loans would likely send the weakest players into financial distress—especially those that have extended further into property-market lending in recent years.

In the 1990s, Japan lost a decade of economic progress to a broken banking system. Today, it’s running the risk of a repeat.

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