Prime Minister Shinzo Abe’s election in 2012 ushered in more expansionist economic policy. PHOTO: KAZUHIRO NOGI/AGENCE FRANCE-PRESSE/GETTY IMAGES

International

Japan’s Banks Are About to Get Even Feebler

par THE WALL STREET JOURNAL | le 19 mai 2019


However the Bank of Japan responds, lenders will be hit by Prime Minister Shinzo Abe’s proposed tax increase

Japan’s banks are the weak link in its economic framework. Prime Minister Shinzo Abe’s insistence on following through with a tax increase could make them weaker still.

On Thursday, credit-ratings company Moody’s downgraded its outlook for Japanese banks from stable to negative. The Bank of Japan , which is holding its benchmark interest rate in narrowly negative territory, was the main cause of the downgrade.

Japanese interest rates are low because economic growth is relatively weak. That is a problem that the 2-percentage-point sales-tax increase scheduled for October will only exacerbate.

Low interest rates have driven down loan spreads in Japan, squeezing banks’ income from lending. Interest rates on new loans issued by regional banks are now well below the level the sector requires to break even, according to Shannon McConaghy, a portfolio manager at hedge fund Horseman Capital who has shorted Japan’s regional banks.

Japan’s central bankers are in a bind. Last time the government increased the sales tax, in 2014, it dinged the country’s promising economic recovery. The BOJ responded by further expanding its ambitious bond-buying program. But low interest rates make that response far less likely this time. Masayoshi Amamiya, an influential functionary who became deputy governor of the central bank early this year, has been a particularly vocal source of concerns about bank profitability.

Whatever the BOJ does, Japanese banks will take a hit. Without its intervention, the economy will likely slow as a result of the sales-tax increase. Regional banks, whose bread and butter is corporate and household loans, are particularly exposed. Japan has already suffered from spillovers from a slowing Chinese economy.

The weak position of regional banks isn’t a new theme for stock investors. Since the election of Mr. Abe at the end of 2012 ushered in more expansionist economic policy, Japanese stocks as a whole have risen by around 50%. Japan’s regional banks are down 10% over the same period.

If the government goes ahead with its tax increase, however, the sector’s problems will only get worse—and there is nothing the BOJ can do about it.