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Japanese banks' margin, profit pressure may ease as long-term rate band widens

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Japanese banks' margin, profit pressure may ease as long-term rate band widens

The Bank of Japan's widening of the range of the long-term interest rate may ease some pressure on the nation's lending margins and boost profits in the banking sector, analysts say.

Japan's central bank said March 19 that it is now buying government bonds to limit fluctuations in 10-year yields within a band of plus or minus 0.25%, widening from 0.20% previously. Meanwhile, short-term rates are maintained at minus 0.1% and long-term rates zero.

The Bank of Japan "aimed to improve profitability of banks through a rise in long-term interest rates," said Takehide Kiuchi, executive economist at Nomura Research Institute and a former Bank of Japan policy committee member. The central bank "could take more action in future to stabilize the financial system."

The slightly wider band may help steepen the yield curve, encourage banks to lend more and allow them to charge higher interest rates, analysts said. Banks as major buyers of government bonds may also profit more from trading of government debt, they added.

Allowing greater interest-rate flexibility is seen by some analysts as an indication that Japan may start moving away from its negative interest rate policy introduced in January 2016. But analysts added that the Bank of Japan stopped short of making a substantial policy shift as the nation's inflation is still below its 2% target and the central bank tried to avoid giving the market the impression it would dial back its stimulus program while the economy is still mired in the pandemic.

The central bank's action could be "a first step" to shifting away from its negative interest rates policy, even allowing shorter-term interest rates to rise, said Toyoki Sameshima, a senior analyst at SBI Securities Co. "This should be a plus for banks."

Both Kiuchi and Sameshima added that the Bank of Japan's move may also encourage banks to consider increasing dividends or resuming purchases of its own shares from the open market, which will help boost their share prices in the long run.

The widened trading band, alongside other policy tweaks, boosted the shares of major banks, whose profits have been suffering from ultra-low interest rates. Shares of Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. rose about 2.0% on March 19 while Mizuho Financial Group Inc. was flat, outperforming the broader market where the Nikkei Stock Average dropped 1.4%.

"We think the [Bank of Japan's] policy announcements are positive for earnings at banks, and think the way it has paid due regard to the impact of sustained accommodative monetary policy on both the financial system and earnings at financial institutions will provide support for bank stocks," Nomura analyst Ken Takamiya wrote in a March 19 note.

Japanese banks have been struggling to drive profit growth amid chronically low interest rates. The domestic loan-deposit margin at Japanese major banks dropped to less than 1.0% in 2020 from more than 1.5% in 2008, according to data from the central bank.

MUFG, for instance, had planned to keep dividends for the current fiscal year the same as the previous fiscal year. The nation's largest bank by assets also halted its share buyback in the current fiscal year ending March 31, the first time in seven years.

Combined net profits at more than 100 Japanese major and regional banks for the fiscal year that ended in March 2020 plunged 50% from a year earlier to about ¥1.1 trillion, according to the Japanese Bankers Association.

As of March 19, US$1 was equivalent to ¥108.86.