THE WORLD SHOULD WATCH JAPAN´S ATTEMPTS TO SAVE ITS STRUGGLING BANKS / THE WALL STREET JOURNAL

The World Should Watch Japan’s Attempts to Save Its Struggling Banks

Low, zero and negative interest rates make banking a low-profit game. Japan’s attempts to get its lenders to merge and cut costs are worth paying attention to.

By Mike Bird

The Tokyo skyline. Other countries should take note of Japan’s moves to help ailing its banks. / PHOTO: PHILIP FONG/AGENCE FRANCE-PRESSE/GETTY IMAGES

Japan is trying to encourage mergers among its ailing regional banks by introducing a sweetener for those that cut costs. Other advanced economies should pay attention: Rock-bottom interest rates mean Japan’s present is likely to be their future.

The Bank of Japan is offering commercial lenders an extra 0.1 percentage point in interest on their deposits with the central bank if they reduce their overhead ratio by certain benchmarks, or merge or integrate their businesses.

After 30 years of falling and even negative interest rates, many of Japan’s regional lenders have share prices of 0.2 to 0.3 times their book value—levels that would have been considered catastrophically low even a few years ago.

A marginal shift in interest rates on accounts held with the central bank might not sound like much, but Moody’s Investors Service rightly notes that given regional banks had an average return on assets of just 0.14% in the last fiscal year, an extra 0.1 percentage point return on large cash balances is nothing to sniff at.

It isn’t the only measure Japan is taking. Later this month, a new law exempting regional banks from normal antitrust considerations comes into force. A merger between Kyushu-based Eighteenth Bank and Shinwa Bank was held up for years by regulators before finally beginning operations last month.

If paying so much attention to small lenders worth little in financial markets seems unusual, it’s worth remembering that without a healthy financial system, it’s far more difficult to implement monetary policy: Banks in distress may not respond to interest-rate signals in predictable ways.

Smaller lenders elsewhere don’t all face the same constraints. Some in the U.S., for example, have serious exposure to the troubled energy sector.

But any institution that relies on interest income is going to be squeezed continually if rates remain low for an extended period, as bond market prices clearly expect them to. 

With less fee income, similar issues are likely to present themselves in regional lenders around the world.

European policy makers should be paying particularly close attention, given their similar desire to consolidate the banking sector.

Banking policy can’t be expected to solve a problem that is fundamentally macroeconomic: Japan’s sluggish nominal growth has required the low interest rates that have hollowed out lenders’ bottom lines. But it can ameliorate the situation significantly.

Breaking down barriers to mergers and offering additional financial incentives to pursue them won’t fix what ails the sector, but it may well encourage more activity, something other countries might want to make a note of.