Japanese Banks Drop as BOJ Unveils Negative Interest Rates

  • Central bank to start charging lenders 0.1% on new deposits
  • Policy may crimp banks' profitability while benefiting economy

Japanese banks including Mitsubishi UFJ Financial Group Inc. tumbled in Tokyo trading after the central bank said it will start charging them for some of their deposits held at the institution.

MUFG, the nation’s biggest bank, fell as much as 8.8 percent on Friday before closing down 2.8 percent after the BOJ introduced a 0.1 percent negative interest rate. Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. both slid 1.7 percent. Lenders’ cash at the central bank will be subject to a three-tiered rate system, whereby the BOJ will continue to pay 0.1 percent on most existing deposits, offer zero interest on required reserves and charge 0.1 percent on additional deposits.

Declines eased after investors digested the move, while the Bank of Japan said the system will minimize any impact on lenders’ earnings and beating deflation will benefit them in the long run. Japanese banks have already been struggling to make money from lending after years of monetary easing, weak credit demand and falling prices squeezed loan margins to among the narrowest in the world.

“Today’s share price move is logical given the impact on profit,” said Shinichiro Nakamura, a Tokyo-based analyst at SMBC Nikko Securities Inc. “The market was heavily sold after the initial announcement, but bounced back as participants calmed later on.”

Net interest margins could fall as much as 6 basis points, which could shave 4 percent to 5 percent off banks’ ordinary profit, according to Nakamura.

Further Moves

When the new policy takes effect on Feb. 16, the 0.1 percent negative rate will probably apply to about 10 trillion yen to 30 trillion yen of funds parked in current accounts at the BOJ, according to people with knowledge of the matter.

BOJ Governor Haruhiko Kuroda said that while the move will push down borrowing costs, he doesn’t expect it will have a large impact on banks.

The central bank will cut the interest rate “further into negative territory if judged as necessary,” it said in a statement. Overcoming deflation as soon as possible “is essential for improving the business conditions for the financial industry,” it said.

Shinsei, Mizuho

Shinsei Bank Ltd. fell the most on the Topix Banks Index, tumbling 11 percent after it cut its annual profit target by 11 percent. Mizuho’s third-quarter profit slid 19 percent, in part because of a drop in lending income, earnings released by Japan’s third-largest bank by market value showed after the market closed.

“Lower rates will keep decreasing loan spreads,” Shinsei’s President Hideyuki Kudo said at a briefing in Tokyo. “And I can’t see that being good for bank earnings,” he said, while adding that the additional easing would have positive effects on the economy.

Shares of Japan Post Bank Co., one of the largest holders of Japanese government bonds, lost 6.7 percent as the benchmark 10-year yield reached a record low after the announcement.

“It’s true banks have been parking funds with the BOJ, earning a positive interest rate because they haven’t got any clue where to lend,” said Stefan Worrall, director of equity cash sales at Credit Suisse Group AG in Tokyo. “What they’re trying to do is a really hardcore push-on-a-string and hope that the banks find some borrowing demand or some other risky assets.”

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