Bank executive says mergers won't fix woes brought by BOJ policy

By Leika Kihara

Japan’s ultra-loose monetary policy is making it tough for commercial banks to earn profits out of lending, a problem that cannot be fixed through bank mergers, the influential chairman of a major regional bank in southern Japan says.

Isao Kubota, chairman of Nishi-Nippon City Bank and once a finance ministry colleague of Bank of Japan Governor Haruhiko Kuroda, praised the BOJ chief’s massive stimulus program for correcting a damaging yen spike and revitalizing the economy.

But Kubota said the length of the stimulus program is causing some problems, including hurting financial institutions’ profits for years due to low interest rates.

Extraordinary monetary steps, such as Kuroda’s massive asset-buying program and negative interest rates, could be useful and effective as “short-term, emergency” measures, Kubota told Reuters.

But Kubota argued that simply prodding regional banks to merge won’t solve a bigger problem created by the BOJ’s yield curve control (YCC) policy, which caps long-term rates at zero.

“Regardless of whether (the BOJ) intends to do so or not, they are squeezing the profits of commercial banks,” Kubota said of YCC’s impact on bank profits. “The other side of the coin is that, this kind of phenomenon is never resolved through, for example, mergers of banks. By nature, because of this policy, banks as a whole are made unprofitable.”

Under YCC, the BOJ now pledges to guide short-term rates at minus 0.1 percent and the 10-year bond yield around zero percent. The policy has made it tough for banks to profit from traditional business of borrowing short-term funds and lending them at higher yields.

“We want an early stoppage to this kind of policy. That we can say. But we can’t say what the authorities should do,” Kubota said, when asked whether commercial banks would be better off if the BOJ abandoned negative rates. “They have powers, authorities. They also have responsibilities for the outcome of their policy.”

Despite the mounting challenges to achieving 2 percent inflation, Kuroda won’t abandon his target, said Kubota, who thinks he sees the governor’s way of thinking “very well” as former colleagues.

Both studied under prominent economists at Oxford University as graduate students dispatched from Japan’s Ministry of Finance.

“He’s confident and he’s a good politician,” Kubota said of the BOJ governor. “Even if he thinks something is dubious, he would never say so, so long as there is a need for the policy.”

© (c) Copyright Thomson Reuters 2019.

©2019 GPlusMedia Inc.

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I don’t really understand how praise can be heaped on bankers as politicians,failed monetary policies,and being trained at Oxford in economics somehow makes the banker somehow able.

Japan has become poorer and less competitive for years now-this is a sign of failure....

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He is confident and he’s a good politician,” Kubota said of the BOJ governor. “Even if he thinks something is dubious, he would never say so, so long as there is a need for the policy.”

So even if he disagrees he won't say so as having a policy any policy is better than dealing with reality? Now that's inspired leadership!

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I don't know whether there's a disconnect between report and editing or not, but the story makes very little sense.

Stop the policy - but no solution proposed, who would publicly say that?

I'm not in finance, but I'd like to think my hunches about Japan has been mostly accurate when things unfold. Deflation, or under inflation is prevalent everywhere (Australia and NZ has had real wage deflation for years despite good trade terms), it's because China has been exporting spare capacity to advanced economies around the world, and it won't end even if all of China's excess capacity is taken up, this is because Chinese money is unlocking addional capacity in developing economies and B&R is enabling it all.

I am guessing Kubota san is unhappy because the investment (read gambling) division of his bank has bought assets like bonds and there isn't enough volatility for his traders to realise profits. His comment about retail lending margins is a bit disingenuous, you borrow at wholesale rate and lend at retail, of course profits is generated, particularly when you consider the fractional reserve system (ie 2% lending margin is like 20%-30% profit margin because banks are holding less than 10% reserve of what they are lending out).

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