Sept. 26, 2016 5:25 a.m. ET
As the Bank of Japan unveiled its latest monetary policy experiment, it highlighted the impact on banks, the key conduits for disseminating monetary policy. The central bank said falling lending rates have eroded margins, enfeebling banks’ ability to lend. That sympathy led bank stocks to rally a bit after the decision Wednesday. Yet bank shares remain beaten down and short interest is high.
The move to peg 10-year government bond yields around zero should help lift bonds beyond that into positive territory. But the BOJ reiterated its intention to keep real interest rates low for long. Gov. Haruhiko Kuroda said in a speech Monday the BOJ’s “main policy tool” would be further cuts to short-term rates and to the target level of the long-term rate. Hardly a boon for banks.
A steepening yield curve could boost banks’ capital gains on bonds it owns through a roll-down effect as time passes. But the reality however is that bank holdings of government bonds have been shrinking, their sensitivity to interest rates has been rising, and profits from trading volumes have plummeted.
Anyway, anticipation of the BOJ’s moves has already nudged the yield curve and further gains may prove elusive. The spread between two-year and 10-year bonds is almost back to where it was pre-negative rates. The TOPIX index of banks has rallied by nearly a third since a July low. Yet they trade for half of their book value.
The BOJ did throw a bone at the banks through a less-noticed change to the central bank’s 5.7 trillion yen ($57 billion) a year exchange-traded fund purchases. The BOJ will buy 2.7 trillion yen of ETFs linked to the broad TOPIX index, and the rest will be split between ETFs linked to the TOPIX, Nikkei 225 and Nikkei 400 indexes. This skews the purchases in favor of the bank-heavy TOPIX. Bank stocks make up 8% of it, according to Bank of America Merrill Lynch, and 1% of the Nikkei 225. This move lifts the stocks without alleviating deeper issues however.
With profitability withering away, Japanese banks may need a lot more help than the central bank is willing to give.
Write to Anjani Trivedi at [email protected]