Japanese banks are likely to gain as the nation's central bank accelerates its shift toward monetary policy normalization by simultaneously raising its benchmark interest rate and tapering purchases of government bonds.
The Bank of Japan decided at its two-day policy meeting, which ended July 31, to increase its short-term rate to 0.25% from the current range of zero to 0.1%. The BOJ also followed through on its June announcement about scaling back on its purchases of Japanese government bonds. The central bank said it will cut monthly buying of the bonds to ￥2.9 trillion by March 2026 from the current ￥5.7 trillion per month, in what amounts to a quantitative tightening move.
The BOJ's decisions "will raise short- and long-term rates, helping banks to charge higher rates for regular lending and housing loans," said Toyoki Sameshima, a senior analyst at SBI Securities.
After ending its experiment with negative interest rates in March, BOJ Governor Kazuo Ueda has regularly talked about cutting back on stimulus to the economy and normalizing monetary policy. The central bank said it will "continue to raise the policy interest rate and adjust the degree of monetary accommodation" if its economic outlook plays out, "given that real interest rates are at significantly low levels."
This rate hike "will have no negative impact on the economy," Ueda told reporters after the policy meeting. Whether the BOJ will consider further rate hikes in the rest of the year will depend on the economic data, he added.
Terminal rate
"The question is whether the BOJ sets terminal rates," said Hideo Oshima, a senior economist at Japan Research Institute.
Oshima expects the BOJ to raise its policy rate above 1.0% by raising rates once more this year and twice in 2025. "Banks will be in more intense competition in collecting deposits as deposit rates will rise before lending rates," Oshima said.
Aggregate outstanding loans by major and regional Japanese lenders rose 3.6% year over year in June, the fastest pace of monthly growth in 2024, according to BOJ data. Major lenders, including the three megabanks — Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. — increased their lending 4.4% in the same month, compared with 3.0% for local banks.
Higher short-term rates will likely increase latent losses in banks' bond investment as the three megabanks tend to shorten the duration of their holdings, Oshima said.
Boosting yields
The bank's other significant policy announcement, the reduced the buying of Japanese government bonds, will ease market demand for the debt, pushing down prices and lifting yields.
The Japanese government is discussing, through a working group, whether banks could buy more of the bonds after the BOJ scales back its purchases of the sovereign debt. The discussions include issuing more shorter-term bonds for banks which tend to shorten the duration of their bond holdings, according to a government report in June.
The BOJ held 47.4% of all outstanding Japanese government bonds, totaling about ￥1,224 trillion at the end of March, including treasury discount bills, according to BOJ data. Japanese private banks owned 13.5% of the total, while insurers owned 16.3% and overseas investors 13.7% of Japanese government bonds. Excluding treasury bills, the central bank’s ownership climbed to 53.2%, followed by 18.3% for insurers and 11.7% for banks, the data shows.
The central bank expects the planned cutback in its Japanese government bonds purchases to drop to around 7% or 8% of its ownership in the bonds.
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