Moody's: Japan banking system stable, but negative rates will increase higher risk assets

The US ratings agency, Moody’s Investors Service, published its latest report on the Japanese banking sector, underscoring risks in wake of BOJ’s negative interest rates policy.

Key Quotes:

“The outlook for Japan's banking system over the next 12-18 months is stable, reflecting Moody's expectation that the banks' operating environment, asset risk and liquidity will remain stable, outweighing pressure on domestic profitability from the Bank of Japan's negative interest rate policy (NIRP).”

“The NIRP has pushed yields on most low risk assets — including Japanese government bonds of most tenors — to near-zero or negative. This situation will encourage the banks to realize capital gains on bond holdings, and invest in higher risk domestic and — particularly for the three megabanks — overseas loan assets.”

“The banks will see higher risk-weighted asset (RWA) growth becoming a key source of capital consumption in the coming years, although most banks can offset this pressure by selling equity holdings, which would lower RWA and reduce capital volatility.”