Business / Economy

Bank of Japan should avoid pushing rates further below zero, head of lenders' association says

by Takashi Nakamichi and Yuki Hagiwara

Bloomberg

The new head of the nation’s main banking lobby is warning the Bank of Japan against deepening negative interest rates, signaling that such a move could spur risky investment and put further pressure on lenders’ profits.

“It will be a quite difficult option to take,” Makoto Takashima, chairman of the Japanese Bankers Association, said in an interview. “Simply speaking, that would cause policy side effects to further grow.”

Speculation for more BOJ easing has resurfaced as the economy weakens and central banks around the world pivot away from policy tightening.

BOJ Gov. Haruhiko Kuroda has indicated that taking rates further negative is one of his stimulus options, even as global debate intensifies over the potential drawbacks, including its effect on lending profitability.

The BOJ needs to “carefully consider” the economic impact of driving the short-term rate further below zero, said Takashima, who is also chief executive officer of Sumitomo Mitsui Financial Group Inc.’s banking arm.

Domestic banks are already faced with very thin lending margins, and some financial firms are turning to risky investments to boost returns, he said.

Large Japanese banks have long been critics of the policy introduced in 2016, which charges financial institutions 0.1 percent on a portion of their reserves to encourage them to use the money more productively and help spur inflation.

Concern about similar policies abroad is also mounting, with officials at the European Central Bank recently raising the issue of how negative rates are hurting banks’ earnings.

In Japan, a deeper negative rate would also make it “more and more difficult” for institutional investors to earn the returns needed to serve their clients, Takashima said. That could make them more dependent on foreign exchange products, emerging market investments or other risky assets to secure yields, he said.

Underscoring those hazards, Mizuho Financial Group Inc. last month announced massive writedowns, including a ¥150 billion charge to restructure its foreign bond portfolio. Moody’s Investors Service said the move was primarily the result of unrealized losses caused by higher U.S. interest rates.

Banks have also been piling into bundled overseas corporate loans, known as collateralized loan obligations (CLOs), a practice that has recently attracted the scrutiny of the Financial Services Agency.

“It is possible that Japan’s financial institutions have a kind of concentrated risk within themselves,” Takashima said, referring to CLOs.

Recent suggestions that the BOJ could introduce a negative lending rate — essentially paying banks to borrow money from the central bank — were also met with skepticism by Takashima, who said such a move probably wouldn’t benefit the economy. Even if it prompts banks to lend to customers at negative rates, it might spur an excessive expansion in credit for real estate, he said.

The lobby group, which represents lenders including the nation’s three mega-banks, has also been critical of the BOJ’s strict adherence to its 2 percent inflation target, a goal that remains firmly out of sight and is keeping any prospects for monetary policy tightening off the agenda.

Takashima’s predecessor, Koji Fujiwara, called earlier this year for the BOJ to instead seek a range of 1 percent to 2 percent.

One concern for Japanese policymakers stemming from the recent dovish tilt by central banks, including the U.S. Federal Reserve, is that the yen could appreciate excessively, harming the export-driven economy.

Takashima said fiscal stimulus would be a better option to counter the economic impact of a stronger yen, rather than monetary easing.

“You can’t solve everything with monetary policy alone,” he said. “That should be clear from the start.”

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