Kuroda Faces Unhappy Banks as BOJ’s Policy Decision Looms

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  • Japan’s biggest bank considering exit from bond dealer group
  • BOJ officials said to be split on implications of the move

Haruhiko Kuroda now has to add the nationa's banks as something else to think about when deciding monetary policy this week.

Photographer: Tomohiro Ohsumi/Bloomberg

As well as a surging yen, non-existent inflation and a weak economy, Bank of Japan Governor Haruhiko Kuroda has something else to think about when deciding monetary policy this week: unhappy banks.

Japan’s biggest lender, Bank of Tokyo-Mitsubishi UFJ Ltd., has led the way in voicing concerns about the negative interest-rate regime introduced by Kuroda earlier this year. Now it’s threatening to withdraw from the club of 22 financial firms that buy newly issued government bonds, worried that record-low yields will sap returns.

QuickTake Abenomics

With inflation far away from the BOJ’s 2 percent target and the nation’s currency this week reaching a 21-month high against the dollar, Kuroda is under pressure to act. Yet if his board decides to lower the key rate below the current minus 0.1 percent, as predicted by some economists, that would further squeeze interest income at banks that are facing a plunge in share prices and forecasting the lowest profit in five years.

While Bank of Tokyo-Mitsubishi UFJ quitting as a primary bond dealer is unlikely to stop the central bank from adding stimulus, “concerns are growing as to whether the cost of BOJ measures will outweigh the benefits,” said Hiroshi Shiraishi, a senior economist at BNP Paribas SA in Tokyo. “This suggests joint efforts to end deflation between the BOJ, government and private sector are falling apart.”

BOJ Split

Views among officials inside the BOJ are split on the implications of Bank of Tokyo-Mitsubishi UFJ leaving the bond group, according to people familiar with discussions at the central bank.

Some officials don’t think the move will cause problems for the BOJ’s easing measures and bond-purchase program, according to the people, who asked not to be identified as the talks are private. It’s a good thing if banks shift their focus away from the government debt market because the BOJ wants them to be looking instead at riskier assets, according to this group, the people said.

Other officials expressed concern that the scale of the BOJ’s unprecedented monetary easing is raising questions about the functioning of the primary-dealer system, according to the people.

For a QuickTake explainer on negative interest rates, click here.

“Japan’s biggest lender moving to withdraw as a primary dealer is seen in the market as a voice for the banking industry,” said Takashi Miura, an analyst at Credit Suisse Group AG in Tokyo. “It’s a symbolic act to rebuff negative rates and any further cutting of the rate.”

About 28 percent of economists forecast the Bank of Japan will ease monetary policy at the meeting ending Thursday, and 55 percent predict a change on July 29, according to a Bloomberg survey. A deeper cut to negative rates and increased purchases of exchange-traded funds are the two most likely measures to be taken, the poll showed.

Japan’s bonds and currency have surged this week on demand for safe-haven assets prompted by concerns that the U.K. may vote to exit the European Union. The yield on 10-year notes fell to a record minus 0.185 percent on Wednesday. The yen has climbed about 13 percent versus the dollar this year, while an index of Japanese bank stocks has tumbled 34 percent, the worst performance on the benchmark Topix.

Most Vocal

Bank of Tokyo-Mitsubishi UFJ and its parent have been the most vocal against negative rates since Kuroda announced the move Jan. 29. Mitsubishi UFJ Financial Group Inc. President Nobuyuki Hirano delivered a rare broadside against the policy in an April speech, saying it has fueled anxiety among households and companies.

“While Hirano stopped short of voicing outright opposition, it was groundbreaking for him to say what he did in public,” said Miura of Credit Suisse. “It’s important for management to express their thoughts rather than just do as they’re told.”

Other major Japanese banks have been less strident. Takeshi Kunibe, head of the Japanese Bankers Association and president of Sumitomo Mitsui Banking Corp., said lenders face a “difficult year” because of the policy. In a March interview, he urged the BOJ to carefully consider its effects before deepening rate cuts.

Shrinking Margins

Kuroda has said that he expects objections to negative rates to recede. Monetary policy is aimed at benefiting the entire economy and not just banks, he said on April 28.

Banks’ net interest margins are shrinking because they are having to cut rates on loans more than deposits, which are already virtually at zero percent and unlikely to enter negative territory for ordinary savers. “Japan will not introduce a policy where individuals are charged for depositing money in the bank,” Shigeru Ishiba, minister in charge of regional revitalization, said in an interview on Tuesday.

An adviser to Prime Minister Shinzo Abe criticized Bank of Tokyo-Mitsubishi UFJ’s stance. Nobuyuki Nakahara, who served on the BOJ’s policy board during its first stab at quantitative easing in 2001, questioned whether the company is acting in its own interests or those of the nation.

“I can’t understand” why the bank would wish to quit the primary dealer group, Nakahara said in an interview on June 10. “A company has the freedom to say or do what it wants but also a responsibility.”