REPEAT: MNI INTERVIEW: Ex-BOJ Offl: High Exit Risks To Banks

Repeats Story Initially Transmitted at 06:34 GMT Feb 16/01:34 EST Feb 16

--Ex-BOJ Yamamoto: Negative Impact of BOJ Easing on Banks 'Serious'

--Ex-BOJ Yamamoto: BOJ Policy Weighs on Banks, Fiscal Discipline

--Ex-BOJ Yamamoto: Banks' Buffer Against A Rate Rise Weaker 

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan's prolonged large-scale monetary stimulus

is causing a "serious" drag on profit margins for lenders and making the BOJ's

eventual exit from aggressive easing more difficult, a former senior BOJ

official told MNI.

     "Banks are seriously suffering from low profits because of the BOJ's

easing," Kenzo Yamamoto, a former executive director in charge of financial

system stability at the BOJ from 2008 to 2012, told MNI in a recent interview.

     "Although it will not immediately cause a worsening of the intermediation

of financial markets, the easy policy has been accumulating potentially high

risks."

     --BOJ EXIT RISKS

     Yamamoto, who is now chairman of NTT Data Institute of Management

Consulting, said banks will be hit by losses from a rise in interest rates and

credit risks that are expected to be caused by an eventual exit from the current

easing program in coming years.

     "The BOJ's policy of keeping the 10-year interest rate around zero percent

has been forcing commercial banks, especially regional financial institutions,

to take big risks," Yamamoto said.

     "The BOJ has said the easy policy is reinforcing portfolio rebalancing

(towards stocks from bonds and cash) at banks, firms and households, resulting

in a weaker yen. But portfolio rebalancing has been largely limited to banks."

     The BOJ adopted a negative interest rate policy in 2016, charging interest

on a small portion of reserves lenders deposit at the central bank. It was aimed

at encouraging banks to lend or invest more, instead of holding piles of cash at

the BOJ.

     --CONTINGENCY FUNDS FALLING

     In order to raise profitability, commercial banks could technically apply

the central bank's overnight negative interest policy to bank deposits by

households and firms -- charging depositors interest -- but that would be

politically unpopular as super-low interest rates have already been lowering

income for savers.

     Therefore, the commercial banks that are suffering from low profit margins

are eating into unrealized profits from investment in securities, contingency

funds that are set aside as a buffer against a future rise in interest rates,

Yamamoto said.

     In addition, regional banks are increasing riskier investment in foreign

government and corporate bonds as well as mutual funds in quest of higher

returns, he said.

     Their domestic funding costs are low, thanks to the BOJ's super-low

interest rate policy, and some portfolio investments bear low credit risks.

However, the banks will face a sharp rise in credit risks once the BOJ begins

unwinding its massive asset purchases and raising interest rates.

     "Banks' capital base is high, so their intermediation will not worsen

immediately. But serious problems will emerge when the BOJ unwinds its

aggressive easy policy," Yamamoto warned.

     If the economy slumps at the time of an exit, there would be only limited

room for the BOJ to lower interest rates further, he added.

     --HIGH POLICY COSTS

     "The BOJ has been buying large amounts of Japanese government bonds but it

has had no effect on the (real) economy. Meanwhile, the costs of easy policy are

considerably high, weighing on banks' revenue and loosening the (government's)

fiscal discipline," Yamamoto said.

     "When interest rates rise, the profit margins for lending will rise, but so

will the credit risks."

     He warned that banks would be vulnerable to higher credit risks if they

continued using unrealized profits from investment in securities to shore up

their earnings. That would lower their ability to lend.

     Yamamoto also said regional banks have been drawn into stiff competition

with government financial agencies that have been offering loans at very low

rates.

     "The distorted conditions have been primarily created by the BOJ's

aggressive easing policy," he said.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com