MNI INSIGHT: BOJ: Slower Capex To Up Costs, Lower Bank Profits

By Hiroshi Inoue

     TOKYO (MNI) - Volatile financial markets, banks' search for yield and

rising corporate credit costs triggering a rise in non-performing loans are all

seen as risks to profitability across the banking sector, with Bank of Japan

officials worried about a downward spiral caused by a slowing economy, MNI

understands.

     Japan's banks, regional banks especially, are increasing investment in

overseas securities, as they seek higher returns amid the prolonged low interest

rates environment at home, with BOJ officials concerned such moves leave the

banks -- and their profitability -- at the mercy of volatile global financial

markets.

     The "search for yield" has seen them increase exposure to overseas assets

and boost exposure to firms with higher credit risks domestically, pushing BOJ

Governor Haruhiko Kuroda to warn recently over the follow-through risk to

financial system stability.

     The BOJ believes some regional banks have boosted their investment in risk

assets without a sufficient corresponding buffer and their capital bases risk

gradual erosion. These financial institutions must pay attention to the

consequences of increased risk, strengthening their risk management against an

economic slowdown, officials bank feel.

     Overall, though, the BOJ feel capital bases at Japanese banks are currently

in reasonable shape, although being undermined by the continued low returns on

investment.

     --RISING NPLS

     There is concern that the lending Japan's banks implemented to companies

for capital investment will become non-performing loans as the economy slows.

     Bad loan provisions at some banks are currently low, with little recent

appetite to build them up as bankruptcies and credit costs sat at low levels as

the economy enjoyed a modest recovery.

     Credit costs are now picking up from the historical low levels of around

zero percent seen last year as corporate profits fell and the economy slowed,

which increased downward pressure on bank profits. Although first glance

suggests this is a boost for banks, it is also likely to further weigh on

indebted corporates, increasing the risk of bigger bad loan books at the banks.

     --SLOWER CAPEX WORRY

     The BOJ's January Outlook Report said capital investment is likely to

continue on its increasing trend, although the pace may slow.

     BOJ officials are increasingly concerned over the risk that bank lending

implemented for capital investment defaults, further weighing reserves and

through to the wider economy and the last policy meeting acknowledged that

downside risks to Japan's economic activity and prices are strengthening

     The BOJ maintains the baseline view that Japan's economy is expected to

expand moderately, which eases the sense of crisis somewhat as that will prevent

a worsening position for banks in the near-term.

     However, the central bank is well aware that it will be too late for banks

to address balance sheet problems if Japan's economy slows or even dips into

recession.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: MMJBJI,MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]