A possible deceleration in the pace of monetary policy normalization in Japan will slow interest income gains at the nation's megabanks after a strong earnings growth in the April-to-June quarter.
Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. all reported sharp gains in net incomes in the fiscal first quarter ended June 30. The megabanks appeared set to continue with strong gains in net interest income for the rest of the year on anticipation of a series of interest rate hikes by the Bank of Japan (BOJ) after the central bank ended its experiment with negative rates in March.
However, a double dose of monetary tightening on July 31 triggered volatility in global markets amid fears that popular carry trade in the Japanese currency would unravel as the yen recovers. Specifically, the BOJ increased its benchmark short-term rate to 0.25% from the prior range of 0% to 0.1%, and followed through on its June announcement about scaling back on its purchases of Japanese government bonds.
Calibrated approach
Shinichi Uchida, the BOJ's deputy governor, told reporters Aug. 7 that the central bank will not raise interest rates when the markets fluctuate, easing concerns that its accelerated shift to the monetary policy normalization will hurt the fragile recovery in the Japanese economy. "To be honest, we have to be more cautious [about monetary policy]. We can select the timing for rate hikes and we need to raise rates at a slow pace," Uchida said.
"That would be a bit minus for banks' net interest income," Takahide Kiuchi, executive economist at Nomura Research Institute, said in an interview.
Mitsubishi UFJ Financial Group's net interest margin (NIM) rose to 0.96% in the April-to-June quarter from 0.77% in the previous quarter. NIM edged lower to 0.83% from 0.88% at Sumitomo Mitsui Financial Group, and to 0.39% from 0.40% at Mizuho Financial Group over the same period.
Still, all three megabanks expect policy normalization to boost their NIMs and interest incomes in coming quarters as their size and diversity of clients gives them better ability to pass higher rates to customers than their smaller and regional peers.
Pushing higher
After the BOJ increased its benchmark short-term rate to 0.25% on July 31, the three biggest lenders announced that they will raise their short-term prime rates. The commonly used benchmark for housing loans will rise to 1.625% from Sept. 2 from the current 1.475%, the first increase in more than 17 years.
"There will be no change in the upward trend [of interest rates] as the Japanese economy is getting out of deflation," Tomoaki Kawasaki, a senior analyst at securities company IwaiCosmo, said in an interview.
The BOJ indicated on several occasions this year that it is open to future rate hikes, keeping its long-term inflation rate target of 2%. "We will move on to the next step" if there is more data confirming the inflationary trend, BOJ Governor Kazuo Ueda said during a press conference after the policy meeting.
Japan's consumer price index, excluding fresh food, was up 2.6% year over year in June, up slightly from 2.5% in May, according to government data released July 19. The inflation rate stayed above 2.0% for the 10th consecutive month, the data shows.