Japanese bank lobby warns BOJ against deepening negative rates

NAGOYA: A Japanese banking lobby head warned of the dangers to the industry if the central bank topped up its already extreme monetary stimulus or deepened negative interest rates, amid signs authorities may have to do just that to support growth.

The escalating US-China trade war has jolted financial markets and triggered an unwelcome yen rise, adding pressure for the Bank of Japan (BOJ) to ramp up massive stimulus to head off risks to the export-reliant economic recovery.

With investors’ risk aversion pushing down US Treasury yields and narrowing the interest-rate gap between the United States and Japan, a cut to BOJ’s -0.1% short-term rate target is considered among the options to counter excessive yen gains.

But Ichiro Fujiwara, who heads an association of Japan’s second-tier regional banks, said deepening negative rates would add to the cumulative pain on the banking sector from years of ultra-loose policy.

“The side-effects of such a step would be bigger and affect not just regional banks but the entire financial industry,” said Fujiwara, who is also president of Bank of Nagoya - a regional bank based in the central Japanese prefecture of Aichi.

“The BOJ may say it will look at the benefits and costs of such measures. But for us, there would be no merits at all,” he told Reuters on Tuesday.

Bank of Nagoya’s home market is among the most competitive areas for lenders operating in Japan.

Home to auto giant Toyota Motor Corporation and its parts suppliers, Aichi has plenty of profitable borrowers unlike other regions in Japan, which are struggling with shrinking populations and an exodus of companies to bigger cities.

But that has intensified competition among banks flocking to the prefecture seeking higher returns. The average lending rate in Aichi was 1.1% in the fiscal year ended March 2018, the lowest among all prefectures, according to research firm Teikoku Data Bank.

Bank of Nagoya is Aichi’s second largest lender but only commands a market share of just over 10%, with more than 20 other banks and small trust associations crowding the market.

Fujiwara said he did not expect interest rates to rise much in coming years, as overseas economic uncertainty kept the BOJ from exiting ultra-loose policy.

That means regional banks needed to quickly come up with new ways to compete, though merging or consolidating business with other banks isn’t necessarily the best option, Fujiwara said.

“I have absolutely no plan to do so,” Fujiwara said, when asked whether Bank of Nagoya could merge or consolidate operations with other banks.

As with other regional banks, Bank of Nagoya needs to become less reliant on conventional lending and grow business through income streams like consultancy and advisory fees, he said.

“Merging or consolidating won’t solve deeper problems.”

Meanwhile, Japan’s Nikkei fell on Wednesday as a stronger yen and fears of a global currency war prompted investors to sell riskier assets, though some upbeat corporate results and Wall Street’s bounce helped curb losses.

The Nikkei stock average ended the day down 0.33% at 20,516.56 points.

“Gains by the yen and lingering concerns towards the U.S.-China trade and currency war weighed on the market. The yuan is still above the 7 per dollar and how currency issues pan out is a key concern,” said Chihiro Ohta, equity general manager at SMBC Nikko Securities.

“That said, sellers are not entirely dominant as there were some solid corporate earnings as well.”

Companies reliant on exports slipped as the yen remained strong against the dollar, staying close to a seven-month high scaled the previous day. The yen is typically seen as a safe-haven during times of market turmoil, and has firmed in recent sessions as the Sino-US trade war suddenly escalated.

Honda Motor Co lost 0.9%, Mitsubishi Electric Corp shed 1.3% and TDK Corp declined 2.2%. Earnings reports also continued to buffet trading.

Sumco Corporation, a manufacturer of silicon wafers used in semiconductors, sank 9.3% after its operating profit fell 18.4% in Jan-June.

Kirin Holdings Co tumbled 5% after Japan’s second-biggest brewer posted a net loss of 7.31 billion yen ($68.8 million) in the Jan-June period.

On the winners ledger, JVC Kenwood Corp soared 15.6% as the maker of car audio and visual systems reported a 77.9% operating profit increase in the April-June quarter.

Renesas Electronics climbed 7.8% after the semiconductor maker’s Jan-June operating losses were not as large as anticipated.

Control equipment manufacturer Yokogawa Electric Corporation added 4.9% on reporting an operating profit increase of 37.5% in April-June.

Fancl Corp rose 2.9% after Kirin Holdings said on Tuesday that it would take a 30.3% stake in the cosmetics company. The broader Topix inched up 0.05% to 1,499.93. Declining shares outnumbered gainers 1,060 to 1,003.

Japanese government bond futures hit a record high and yields hit multi-year lows after New Zealand’s central bank suggested it could take interest rates into negative territory after cutting its benchmark rate more than expected.

Major central banks have been cutting interest rates due to growing concerns about the global economic outlook.

The unusually dovish stance by the Reserve Bank of New Zealand suggests policy rates have more room to fall, which will push already depressed global bond yields down even further.

Benchmark 10-year JGB futures rose 0.22 point to 154.39, with a trading volume of 29,439 lots. At one point, the futures rose to a record high of 154.46. The 10-year JGB yield fell 1.5 basis points to minus 0.200%. Earlier 10-year yields touched minus 0.215%, the lowest since July 2016.

The 20-year JGB yield fell 2.5 basis points to 0.140%.

At the short end of the curve, the two-year JGB yield fell 1 basis point to minus 0.235%.

The five-year JGB yield fell 2 basis points to minus 0.295%. Yields on five-year cash bonds earlier hit minus 0.289%, the lowest since July 2016.

Reuters