Fitch: Negative Interest Rates Put More Pressure on Japanese Banks' NIM

Negative interest rates in Japan will add further pressure on the Japanese banking sector's already thin net interest margins (NIM). The short-term direct impact is limited as the negative interest rate is applied only to additional funds placed at the Bank of Japan. However, in the medium to longer term, lower reinvestment yield on assets will lead to NIM erosion.

Mega banking groups' diversified revenue sources, which include fees and commissions and profits from overseas businesses, should serve as buffers. Smaller, domestically focused banks that are more reliant on interest income will be more exposed to NIM pressure. Business models and risk appetites may change, though Fitch does not expect the banks to make significant shifts without first building up sufficient capital buffers, in light of developments in regulatory capital requirements.

Fitch expects the impact of negative interest rates on mega banks to be neutral, with the impact being greater for the smaller, unrated banks. Negative rating implications may stem from other factors, such as the failure of Abenomics and worse-than-expected deterioration in the global economy.