Losses Loom as New Normal at Japan's Banks, Ex-BOJ Official Says

(Bloomberg) -- Reporting losses may become widespread for Japanese banks in the near future as their bottom lines suffer from a shrinking population and interest rates kept at ultra-low levels by the Bank of Japan, according to the former head of the central bank’s financial system department.

"We are heading into uncharted territory for financial system risk," Atsushi Miyanoya, 59, said in an interview on Oct. 25. He warned that “losses will probably become the norm for banks in the not-too-distant future” if they don’t take more action to secure their profitability.

Miyanoya, who was an executive director at the BOJ when he left the central bank in May, added that it wasn’t clear how bank account holders would react to repeated losses.

While his remarks don’t suggest a need for immediate action by the BOJ at its meeting this week, they highlight the growing pressure on commercial bank profits that could eventually nudge the central bank into raising rates before it achieves its inflation goal.

Officials at the BOJ have expressed more concern about the squeezed profits of Japan’s regional banks in recent months, but have stuck to the line that monetary policy isn’t the root cause of the problem. Policy tweaks in July to allow greater movement in 10-year government bond yields provided a small measure of relief for the bond market but offered little help for commercial banks.

Regional Banks

Among Japan’s 106 regional banks, 54 reported losses in their main business of lending in the fiscal year ended March. Some 23 of them have been losing money on loans for more than five straight fiscal years, a Financial Services Agency report showed in September. That’s pushing more and more banks to take on riskier lending to turn a profit, said Miyanoya, who is currently chairman of NTT Data Institute of Management Consulting in Tokyo.

In a semi-annual financial system report on Oct. 22, the BOJ kept its assessment that the system remains stable “on the whole,” but said that the commercial banks’ core profitability has continued to weaken as the population shrinks, competition intensifies and interest rates stay low.

Miyanoya said the banks need to take more action to avoid losses that could further lower their capital buffers against economic shocks, adding that capital levels were already on a clear downward trend.

The BOJ’s financial system report already warns that the core capital ratio of Japanese regional banks could fall to 7.6 percent in a crisis, dropping below the healthy threshold of 8 percent.

Regional banks need to improve their running cost efficiency and take a more conservative stance that ensures the loan rates they charge match the risks involved, Miyanoya said.

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