MNI INSIGHT: New Deposit Facility A BOJ Warning To Regions

The Bank of Japan's introduction of a Special Deposit Facility for regional banks should not be seen as a measure of blanket support for the sector in its current form but rather as the central bank pushing for greater reform and consolidation with the aim of strengthening the wider financial system, MNI understands.

The Covid-19 pandemic has added to the strain on regional banks and credit unions, already facing challenges from prolonged monetary easing, negative interest rates and population decline. The new SDF for regional financial institutions could be viewed as a shot across the bows by the BOJ on banks that blamed lower profitability on the central bank's negative interest rate policy.

To help, the BOJ board decided to pay additional interest of 0.1% on the central bank current account reserves of regional banks when they boost profitability or improve operations through consolidation.

NOT SO FRIENDLY

The BOJ's move was broadly seen as a friendly nod to regional banks.However, MNI understands the message was "you have to reduce costs and to increase profitability and if you make utmost efforts to do that, the impact of the negative rate policy will disappear. If you can do that, go ahead."

Although the new SDF will aid the transmission of policy, it should also be seen as a central bank warning that the regional banks will be helped, but they must take some steps against the current conditions to help themselves.