MNI INSIGHT: Japan Banks Face Headwinds; Property Loans 'Red'

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan is concerned regional banks will face

growing difficulties using the low cost of credit to dress up earnings, as a

slowing economy will soon weigh on corporate profits, increasing company

bankruptcy levels and impacting on banks reserves, MNI understands.

     The BOJ's semi-annual Financial System Report due out April 17, a week

ahead of the next policy meting, is expected to emphasize the need for

struggling banks to prepare contingency measures for such an outcome, but it

will not prompt the central bank to mull unwinding its easy policy although

officials will continue to monitor accumulated side-effects.

     --STABLE FINANCIAL SYSTEM

     The next FSR will likely repeat that Japan's financial system is in no

current danger, with capital bases at regional banks operating domestically well

above the required 4%.

     However, the BOJ sees it as appropriate for the Financial Services Agency,

Japan's banking watchdog, to raise the 4% level as it is lower than the 7 to 8%

that overseas regulators require their private banks operating domestically

hold.

     But as banks struggle with low profits, they will be required to write off

unrealized losses of securities, which in turn will hit their capital bases,

which could quickly become a downward spiral, even threatening the existence of

some banks.

     Around half of Japan's 106 regional banks are struggling to meet running

costs, with their margins on lending rates low and falling, forcing them to run

down their loan-loss reserves built up as the economy recovered in recent years.

However, the downturn will increase the need for banks to rebuild their reserves

to address the problems ahead.

     --TURNING RED

     The April FSR is expected to show that the real estate loans/GDP ratio will

turn to "red" from the "green" seen on the BOJ's heat map, an indicator of

stress levels in the system, in the October FSR, but the central bank will not

be overly concerned, as it has expecting such a move and sees no bubble building

in the sector.

     The previous FSR said "some financial indicator indexes are getting closer

to red, although still in the green zone" and "the real estate loans to GDP

ratio has reached a historical high, deviating from its trend."

     Property lending-to-GDP at the end of 2018 was 14.18%, higher than the

long-term trend of 11.66%, according to estimates by a private think tank.

     Overall, the FSR will likely repeat October's assessment, saying financial

markets haven't shown signs of overheating and the domestic financial system

has, on the whole, been stable.

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

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

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