MNI INTERVIEW: BOJ Simulation Tough on Regional Banks: Ex-Aide

--Ex-BOJ Yamamoto: BOJ Should Review Validity of 2% Price Target

By Hiroshi Inoue

     TOKYO (MNI) - Regional banks will find it difficult to meet the Bank of

Japan's medium-to-long-term blueprint of increased operating efficiency, and the

central bank's target may be unrealistic, a former BOJ executive director in

charge of financial stability told MNI.

     "(They) have implemented considerable cost savings. But their efforts to

reduce costs don't match up with the rise in credit costs. The BOJ's simulation

is very tough for regional banks," Kenzo Yamamoto, now a representative for

KYinitiative, said in an interview Thursday.

     The BOJ Financial System Report said the medium-to-long-term goal for banks

was an improvement in operating efficiencies, such as overhead cost savings and

increases in net non-interest income such as fees and commissions. This is

referred to by the Bank as the "increasing efficiency case."

     "For regional banks, this improvement can be achieved by increasing their

net non-interest income by about 10% over the next 10 years and saving by about

1% per year on their overhead costs, which is the observed average pace in

recent years," the FSR noted.

     --COST SAVING

     According to Yamamoto, regional banks are implementing various cost saving

measures, but they are struggling to close branches in some areas due to strong

opposition from depositors and lawmakers in regional cities.

     Japan's regional banks will face an even more severe situation from higher

credit costs if the economy slowed further, as, along with the prolonged low

rate environment, it will increase their difficulty increasing profit, he added.

     In the last fiscal year, their credit costs rose 0.12%, three times higher

than the previous period, BOJ estimates show.

     "The recent rise in credit costs isn't directly linked to the economy. But

looking ahead, if conditions deteriorated, credit costs will increase, putting

more pressure on regional banks to further cut their costs," Yamamoto said.

     Despite rising credit costs, banks haven't sufficiently increased their

loan loss reserves, until now taking refuge behind the limited pick-up in the

number of corporate bankruptcies. Their inability to boost profits in line with

the increased risk profiles has also hampered building reserves.

     --PRICE TARGET PROBLEM

     Addressing monetary policy, particularly the inflation target, Yamamoto

says the BOJ should review the validity of both the 2% price target and the

effectiveness of its aggressive easy policy.

     Despite growth largely in line with its forecasts, the BOJ hasn't hit its

target having conducted easy policy for more than six years, he noted, and

inflation forecasts continued to be downgraded.

     Yamamoto said if the BOJ continues to target the 2% level, it must maintain

or increase its aggressive easy policy, which will in turn squeeze banks'

profits. However, he says there is little to suggest inflation is set to move

from its current levels, with no momentum for either a sharp fall or a rise

towards 2%.

--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

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