Japan banks clinch $1.98b boost in interest income after policy shift

But a rise in deposit rates presents risks, analysts warned.

Japan’s banking industry is expected to benefit with an additional $1.98b (JPY300b) in interest income per year from the Bank of Japan (BOJ)’s recent decision to exit its negative interest rate policy (NIRP), the Bank of America Global Research said in a report.

However, there were some concerns about the risk of deposit rate increases, noted research BofA Global Research analysts Shinichiro Nakamura and Yuki Yaginuma.

“However, even with ordinary deposit rates of 0.02% and a 5bp increase on time deposit rates industrywide, the estimatedJPY290b (approximately $1.92b) annual increase in deposit interest expense could be covered by the increase in interest income on BOJ current accounts,” Nakamura and Yaginuma said.

Megabanks have already taken the lead in raising deposit rates. Notably, MUFG Bank raised its rate on ordinary deposits to 0.02%, from 0.001% previously.

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Overall, Nakamura and Yaginuma see little risk of disruptions to the financial system following the NIRP exit, as the BOJ probably revised its policies following extensive discussions with the banking industry, they said.

Whilst bank stocks–which had already priced in an end to the negative interest rate policy (NIRP)– would basically be weak for a while, banks’ valuations could benefit from "positive optionality" on potential future interest rate rises, in the summer onward, they added.

(US$1 = JPY150.92; as of 21 March 2024, 3:13PM)