Japanese banks see a ‘difficult’ year ahead with negative rates

Negative interest rates will make next year a difficult one for Japanese lenders and the central bank should examine the impact of the policy before pushing them further below zero, the new head of the country's banking lobby said. The Bank of Japan's decision to charge lenders on some of their reserves will generate positive effects for the industry in the long run if it pulls the country out of deflation, said Takeshi Kunibe, who starts his second stint as chairman of the Japanese Bankers Association on Friday. "But bank earnings will be negatively impacted in the short term."

Bank shares are the worst performers in Japan this year on concern that negative rates will further squeeze their interest income as well as impose costs for holding any extra funds that they don't lend to consumers and companies. Kunibe, 62, who is president of Sumitomo Mitsui Financial Group Inc.'s lending unit, said it's too early to tell whether the policy will lead to lower revenue and profit next year.

"That's something each bank will have to address,'' he said March 25 in an interview. "But if we're working on the assumption that the negative interest-rate policy is going to continue, then it's going to be a difficult year.''

Japan's banks are expected to provide guidance on how their earnings will be impacted in the year starting April 1 when they give forecasts in May. Standard & Poor's estimated in February that negative rates will erode the profitability of regional lenders by 15 percent and major banks by 8 percent.

Kunibe said he hopes any further expansion of the negative rate or widening of its application will only take place after the Bank of Japan carefully considers the effects of the minus 0.1 percent deposit rate introduced Feb. 16.

Bank of Japan Governor Haruhiko Kuroda told lawmakers on March 16 that it would be "theoretically possible" to reduce the rate to as low as minus 0.5 percent. The central bank has said that the impact of the policy on lenders' profits will be limited because the rate only applies to a portion of their deposits held at the institution.

Sumitomo Mitsui Banking Corp. isn't considering passing on the cost of negative rates to its depositors, Kunibe said. At the same time, he didn't rule out the possibility of applying them to its largest customers such as financial institutions in the future.

"The objective of negative rates is to expand Japan's economy by stimulating consumption and investment through lowering and flattening the yield curve," said Kunibe. "The policy was introduced just as the world was moving away from risk, which dampened the impact, but I think we'll see the effects coming through little by little over time."

Kunibe first served as Japanese Bankers Association chairman, a role that typically rotates among the presidents of Japan's three socalled megabanks, from April 2013 to March 2014. He takes over from Mizuho Financial Group Inc. President Yasuhiro Sato. "I think this year will mark a crucial point in whether Japan will succeed in breaking free from years of deflation and return to a path of sustainable economic growth," Kunibe said.