Japan’s Biggest Bank Urges BOJ to Weigh Policy Side Effects

(Bloomberg) -- Mitsubishi UFJ Financial Group Inc.’s main lending unit urged the Bank of Japan to consider the side effects of negative interest rates at next week’s meeting, saying the policy will continue to squeeze lending income.

“When it comes to margins, because of negative rates and the competitive environment, they continue to be compressed,” said Takashi Oyamada, president and chief executive officer of Bank of Tokyo-Mitsubishi UFJ Ltd., referring to net interest margin, a measure of banks’ loan profitability. “So overall net interest income is not likely to grow -- it’s very difficult to see it increasing.”

Japanese banks have struggled to make money from lending since the BOJ announced plans to start charging fees on some of their reserves in January, a policy that has faced criticism from bank executives and lawmakers as evidence mounts that negative rates are doing little to spur growth and prices. The BOJ will reveal the results of a policy review after the two-day meeting ends on Sept. 21, and some economists expect another rate cut.

No Conflict

“It’s not that we’re in conflict with the BOJ or advocating against the BOJ,” Oyamada, 60, said in an interview Thursday during a one-day visit to Singapore. “Negative rates over a long period of time would have some intended effects such as creating real demand and rebalancing portfolios. But there’s also side effects, so we would like the BOJ to look closely and meticulously at what the side effects are and how they manifest themselves.”

Loan growth in Japan remains “resilient” in a range of 2 percent to 3 percent even though the economy is barely expanding, said Oyamada, who became CEO in April. Net income at Tokyo-based MUFG, Japan’s biggest lender, fell 32 percent in the three months ended June 30 from a year earlier to 188.9 billion yen ($1.8 billion) as lending profit shrank.

BOJ Governor Haruhiko Kuroda acknowledged this month that the negative-rate program has hit profits at financial institutions, but said it hadn’t hurt bank lending. MUFG President Nobuyuki Hirano criticized the policy in a speech in April, saying it has contributed to anxiety among households and companies and prolonging it may weaken lending profits.

Oyamada said MUFG is dealing with the pressure negative rates place on profitability by focusing on growth areas such as asset management and by continuing to boost earnings overseas. The stock rebounded Friday after four days of losses, rising 2.5 percent as of 11:03 a.m. in Tokyo, paring this year’s decline to 33 percent.

Japan’s Biggest Bank Urges BOJ to Weigh Policy Side Effects

Japanese bank shares are among the worst performers in the country this year, with the Topix Banks Index slumping 29 percent compared with a 16 percent drop for the benchmark Topix.

Just over half of economists surveyed by Bloomberg forecast an expansion of monetary stimulus next week, while others point to a decision in November, December or next year. A small minority expect no change in the foreseeable future. The BOJ will probably cut the rate on some bank reserves to minus 0.2 percent from minus 0.1 percent, Morgan Stanley MUFG Securities Co. economists Takeshi Yamaguchi and Robert Feldman wrote this week.

Talking points in the comprehensive review by the BOJ include the benefits and costs of a flattened yield curve, an assessment of efforts to boost inflation expectations and falling liquidity in bond markets, according to people familiar with the process. Long-term interest rates have risen recently on speculation that the central bank will take steps to steepen the yield curve.

“When the yield curve steepens, that means we have more opportunity to invest and enjoy investment gains, so that would be a relatively positive development," said Oyamada. A further rate cut would counter the effects of a higher curve, he said.

Charging Depositors

It would be “difficult” to start charging individual or corporate customers for their deposits to cope with the central bank policy, Oyamada said. “We would need to obtain the understanding of depositors,” he said.

Japan’s largest banks have been expanding elsewhere in Asia, where growth is faster and loan margins are higher. Bank of Tokyo-Mitsubishi UFJ will continue to keep Asia as a pillar of its growth abroad, said Oyamada, adding that a priority is to potentially expand operations in Indonesia, both organically and through an acquisition.

“We do have a long list of candidates” in the Southeast Asian nation, said Oyamada. While he didn’t give the size of a preferred target or a timeframe, he said the company wants a “good” commercial bank.