Here's One Sign That Abenomics Is Working

  • Economic recovery, Abe reforms are fueling demand for credit
  • Bank shares could climb if interest margins also improve

It’s shaping up to be another good year for lending in Japan, data showed on Wednesday, offering further evidence that -- for all its shortfalls -- the Abenomics program of reflation continues to make progress.

One measure of loans outstanding jumped by 2.9 percent in February from a year before, and has gained at least 2 percent each month since the spring of 2013 -- a pace not seen in Bank of Japan records going back to 1992, the year Japan’s land-price bubble popped. The total outstanding loan book is now at the highest since 2001.

Among the priorities in Abenomics has been shaking up corporate governance and the property market, and that might have contributed to the pick-up in credit. Financing for mergers and property purchases have combined with the economic expansion to spur lending demand, according to a BOJ official who wasn’t authorized to speak publicly.

While at first glance Japan’s economic growth has been uninspiring, averaging just 0.59 percent in the four years since Prime Minister Shinzo Abe took office, it has showed increased stability last year. Annualized quarterly rates exceeded 1 percent for each quarter, marking the first year without a contraction since 2005.

The size of the economy hit a record for the first time since the 1990s last year -- read here why that matters.

The lending demand has given some support to Japan’s banks, which were hammered by the introduction of negative interest rates early last year. That move by the BOJ, designed to reduce the appeal of holding cash and boost reflation, compressed lending margins. Now that the focus on the BOJ has shifted to when it might ease back on monetary stimulus, the outlook for margins as well could shift.

“We’re finally starting to see the signs of the bottom in terms of profit for the bank sector and even some improvement," said Shunsuke Kobayashi, an economist at Daiwa Institute of Research in Tokyo who characterized lending volume as "healthy."

Shares of Mitsubishi UFJ Financial Group Inc. and its peers have jumped since last year’s U.S. presidential election on speculation that global interest rates will rise as the Trump administration boosts American growth. The Topix Banks Index on Wednesday fell 0.2 percent at the close, in line with the broader Topix.

"The next point of focus should be on when the loan growth is able to outpace the decline in interest margins," said Nana Otsuki, executive director and chief analyst at Monex Group, a Tokyo-based online broker. "If banks are able to get there by March 2018, that’ll be a huge turning point for banking stocks,” she said.

Margin Shrinkage

The average net interest margin for banks in the Topix index stood at 1.16 percent in February, down from 1.23 percent a year before and 1.33 percent when Abe took office in December 2012.

As has been the case for some time, regional banks are leading the growth in lending, with a 3.5 percent jump in February from a year before. Japan’s so-called city banks increased lending by 2.1 percent. Overall deposits continued to grow faster than loans, rising 4.4 percent, underscoring the penchant among both domestic households and companies for cash in an economy where policy makers are still battling to end a "deflation mindset."

"Banks have had a good run and the story is getting better," said Arthur Kwong, head of Asia Pacific equities at BNP Paribas Investment Partners in Hong Kong. "But you still need to wait and see."

— With assistance by Yuko Takeo, and Livia Yap

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