BOJ should avoid deepening negative rates: Takashima

Bloomberg

The new head of Japan’s main banking lobby warned the central bank against deepening negative interest rates, signalling such a move could spur risky investment and put further pressure on lenders’ profits.
“It will be a quite difficult option to take,” Makoto Takashima, chairman of the Japanese Bankers Association, said in an interview. “Simply speaking, that would cause policy side-effects to further grow.”
Speculation for more Bank of Japan easing has resurfaced as the economy weakens and central banks around the world pivot away from policy tightening. Governor Haruhiko Kuroda has indicated that taking rates further negative is one of his stimulus options, even as global debate intensifies over the potential drawbacks, including its effect on lending profitability.
The BOJ needs to “carefully consider’’ the economic impact of driving the short-term
rate further below zero, said Takashima, who is also chief executive officer of Sumitomo Mitsui Financial Group’s banking arm. Domestic banks are already faced with very thin lending margins, and some financial firms are turning to risky investments to boost returns, he said.
Large Japanese banks have long been critics of the policy introduced in 2016, which charges financial institutions 0.1 percent on a portion of their reserves to encourage them to use the money more productively and help spur inflation. Concern about similar policies abroad is also mounting, with officials at the European Central Bank recently raising the issue of how negative rates are hurting banks’ earnings.
In Japan, a deeper negative rate would also make it “more and more difficult’’ for institutional investors to earn the returns needed to serve their clients, Takashima said.
That could make them more dependent on foreign-exchange products, emerging-market investments, or other risky assets to secure yields, he said.
Underscoring those hazards, Mizuho Financial Group Inc last month announced massive writedowns including a $1.4 billion charge to restructure its foreign bond portfolio. Moody’s Investors Service said the move was primarily the result of unrealised losses caused by higher US interest rates.
Banks have also been piling into bundled overseas corporate loans, known as collateralised loan obligations, a practice that has recently attracted the scrutiny of Japan’s financial regulator. “It is possible that Japan’s financial institutions have a kind of concentrated risk within themselves,’’ Takashima said, referring to CLOs.
Recent suggestions that the BOJ could introduce a negative lending rate  were also met with skepticism by Takashima, who said such a move probably wouldn’t benefit the economy.