Shinzo Abe's expansionary economic policies may be aimed at bolstering Japan's global manufacturing groups, but the country's biggest banks are suffering an Abenomics ordeal.
The three biggest Japanese lenders – Mitsubishi UFJ, Mizuho and Sumitomo Mitsui – on Wednesday forecast lower profits for the financial year to next March, as the aggressive monetary easing promoted by the prime minister and his central bank governor, Haruhiko Kuroda, pushes them out of the relatively lucrative government bond (JGB) market.
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Banks have for years counted on income from JGB trading to supplement the poorly paid business of lending to companies. Japan's corporate sector is flush with cash and – given the country's weak growth – has little need for new factories or equipment in any case. When companies do turn to banks for funds, it is at rates so low as to make the loans barely profitable.
Mr Kuroda in effect took the JGB business away from banks last month. As part of an effort to end Japan's prolonged deflation, the Bank of Japan doubled the amount of bonds it buys each month – mopping up about 70 per cent of new issuance from the government. That has led to a collapse in trading volumes and, in effect, squeezed private financial institutions out of the market.
"In a sense, we are back to cruising speed," said Nobuyuki Hirano, president of Mitsubishi UFJ, Japan's largest bank by assets. "We had a large profit from selling bonds last financial year but we are expecting it to sharply fall this year."
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The bank projected that net profit would fall 10.8 per cent in the year to next March, to 760 billion yen ($7.4 billion). Mizuho, the second-biggest lender, forecast a decline of 10 per cent and third-ranked Sumitomo Mitsui said it expected profit to fall by a quarter.
If Abenomics works and the economy moves into a period of sustained higher growth, Japanese banks could ultimately benefit. Greater corporate appetite for investment should allow banks to charge more for loans. For now, though, the BoJ's policy of keeping markets awash in cash is suppressing interest-rate spreads and offsetting potential gains from rising lending volumes.
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Mr Hirano said domestic corporate lending had "hit bottom around the middle of last year", but added "that does not mean that we see increasing demand from companies as a whole".
On the plus side, a surging Nikkei 225 stock average has increased the value of banks' holdings of Japanese shares and boosted sales of investment trusts, bringing in more fee income.
Some banks are looking overseas to make up for the weak outlook at home. Sumitomo Mitsui said this month it would buy a $1.5 billion stake in Bank BTPN of Indonesia, and last month Mitsubishi bought a $3.7 billion portfolio of US property loans from Deutsche Bank.
Additional reporting by Reuters.