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Japanese Banks See Economy Withstanding Sales Tax Increase

Japan Banking Association Nobuyuki Hirano
Nobuyuki Hirano, president of Mitsubishi UFJ Financial Group Inc. and chairman of the Japan Banking Association. Photographer: Akio Kon/Bloomberg

Japan’s economy will probably withstand a sales tax increase that takes effect today as Prime Minister Shinzo Abe prepares economic stimulus measures and companies raise wages, the country’s new bank lobby chief said.

Abe remains on track to achieve his goal of ending deflation after embarking on unprecedented monetary easing and fiscal spending a year ago, Nobuyuki Hirano, who replaced Takeshi Kunibe today as chairman of the Japanese Bankers Association, said in an interview. Hirano is president of Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank.

The 3 percentage-point tax increase to 8 percent may trigger Japan’s deepest one-quarter economic contraction since the March 2011 earthquake, economists surveyed by Bloomberg estimate. The government plans to front-load budget spending to help weather the blow from the higher levy, and the Bank of Japan has signaled that it’s ready to boost easing if needed.

“The risk to Abenomics is how it can overcome a dip in the economy that’s expected to result from the sales tax hike,” Hirano, 62, said in the interview in Tokyo last month, referring to the prime minister’s policies. “But there’s a good chance that the economy will withstand the increase.”

Gross domestic product will shrink 3.5 percent in the three months ending June, according to the median estimate of economists, ending a projected six straight quarters of growth. The government approved a 5.5 trillion yen ($53 billion) extra budget in December to offset the impact of the higher sales tax.

Lending Growth

Hirano said the contraction will be temporary and won’t have a large impact on banks’ earnings as loan demand continues to pick up.

“Credit demand is rising from various sectors and I expect the trend of lending growth will be sustained through this fiscal year,” Hirano said. Loans at major banks climbed for a 15th month in February, Bank of Japan data show.

Sentiment among large Japanese manufacturers rose to the highest level since 2007, a quarterly Bank of Japan report showed today. The Tankan index climbed to 17 in March from 16 in December, according to the report.

The benchmark Nikkei 225 Stock Average, which has slid 9 percent this year, was little changed at 10:44 a.m. local time. Shares of Mitsubishi UFJ rose 0.5 percent to 570 yen. Sumitomo Mitsui Financial Group Inc., the nation’s second-largest bank by market value, increased 0.9 percent, while Mizuho Financial Group Inc. added 1 percent.

Raise Salaries

Companies from Toyota Motor Corp. to Lawson Inc. agreed to raise base salaries last month after Abe called on business leaders to increase pay to help sustain growth. Mitsubishi UFJ, Sumitomo Mitsui and Mizuho plan to raise salaries for the first time in 19 years. Their lending units will each increase base pay by 0.5 percent in the year starting today, in line with labor union requests, bank officials said last week.

The three so-called megabanks are poised to report record combined annual net income of 2.42 trillion yen for the year ended March, according to the average of analysts’ estimates compiled by Bloomberg.

Still, lending profits are constrained by interest rates kept low by the Bank of Japan’s program of buying about 7 trillion yen of bonds a month. Net interest margins for the 87 lenders on the Topix Banks Index average 1.28 percent, the least in Asia, according to data compiled by Bloomberg.

“When demand gets stronger, loan margins will stop narrowing,” Hirano said, without giving a specific time frame.

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