January 1st, 2017
Norinchukin Research Institute Co., Ltd.
SHIGETO Yukari, Senior Chief Researcher
■Abstract
The Bank of Japan (BOJ) made an unprecedented move towards negative interest rates in January 2016 in an attempt to invigorate the economy. This caused Japan’s household financial assets to dip 0.4% in March from a year earlier, their first decline since September 2009. They fell a further 1.7% in June, accelerating the pace of decline.
The introduction of negative interest rates also eroded Japanese banks’ profitability from lending and investing in securities. In the first half of fiscal 2016, 47 out of 64 regional banks reported declines in net income, and 38 of them recorded double-digit falls in profits. Experts had long warned that Japanese regional banks would face serious structural problems in coming years due to depressed demand for loans caused by a shrinking population. But even before a tide of demographic changes could swamp the financial sector, it has been hit hard already by a squeeze on lending margins from the BOJ’s radical monetary policy.
Meanwhile, the Financial Services Agency (FSA) has been pushing regional banks to undertake a more sustainable business model by underwriting loans on business prospects of local companies, instead of relying on collateral and guarantees. The FSA itself has declared to reform its regulatory approach, moving away from the conventional supervisory approaches that focus on checking conditions of assets and prioritize compliance with rules.
Taking the above factors into account, it can be observed that the year 2016 marks a turnaround for financial policies in Japan.
■Introduction
In April 2013, the Bank of Japan (BOJ) expanded its monetary easing program into a whole new dimension, known as quantitative and qualitative easing (QQE), in a bid to end deflation. By boosting inflation expectations through lower real interest rates, it hoped Japanese households and businesses would finally start portfolio rebalancing by increasing their appetite for risk inclined assets. But since then global uncertainty grew triggered by falling oil prices and an economic slowdown in China, sending the stock market plunging in August 2015.
In January 2016, the BOJ’s policy committee approved a decision to adopt a new policy of “QQE with negative interest rates” to avoid downside risks for the domestic economy and prices, while aiming to achieve the price stability target of 2 percent. This was designed to apply negative interest rates to a portion of current accounts that financial institutions keep at the central bank, with a combination of its massive Japanese Government Bond (JGB) purchases, in order to push further downward pressure on entire interest rates.…Link reading