Bank of Japan’s 'yield curve control' unlikely to improve banks' profitability - Fitch

Japanese bank profitability has been under immense pressure with net interest margins (NIMs) falling steadily since 2010. The weak domestic economy has kept loan demand subdued and fierce competition among financial institutions adds to the drag on earnings. Moreover, the continued strengthening of the yen despite BoJ easing has added to the pressure on both banks and corporates in Japan.

Bank of Japan (BOJ) measures in September came in recognition of the pressures brought about by negative interest rates. The central bank introduced yield curve control at its September meeting with an intention to help banks and pension funds improve their profitability. Under the yield curve control program, the bank intends to keep the yield on the 10-yr Japanese government bond at zero percent and engineer a steeper yield curve.

However, ratings agency Fitch says the latest measures could actually end up undermining the efforts to boost the economy. Fitch says the new framework is unlikely to do much to boost bank profitability, since interest rates on only a relatively small proportion of bank lending are sensitive to 10-year bond yields. The majority of bank lending has an interest-rate renewal period of less than one year. In light of these factors, banks are unlikely to be spurred into lending more aggressively by the new policy framework, and the BoJ could be forced to make further alterations to try to boost the economy.

PM Abe’s aide Nobuyuki Nakahara commenting on the BOJ’s monetary policy program earlier today said that the BOJ’s yield control is a disappointing move away from monetary-base expansion. He said the decision to conduct a comprehensive review of monetary policy had invited defeat on reflationist efforts and would raise questions about Abenomics as a whole.