Back to List
Financial Research Regional finance that requires change
（No. 44）
New threat to the financial system in the Post-COVID-19 era
― Japanese Domestic Banks have 3 trillion yen in stranded assets
2021/06/04
Summary
- The Bank of Japan (BOJ) decided to revise its policy at the Monetary Policy Meeting held on March 19, 2021. The BOJ widened the target range of long-term interest rates to ±0.25% and introduced a new “‘Interest Scheme to Promote Lending’ and a ’Fixed-rate purchase operations for consecutive days’.” The annual purchase target amount of risky assets has been eliminated, leaving only the maximum amount. The “Assessment for Further Effective and Sustainable Monetary Easing (the Background),” released at the same meeting, states that the quantitative and qualitative monetary easing, with long- and short-term interest rate operations (Yield Curve Control; YCC), has been effective, based on the expected mechanism. It concludes that the YCC should be maintained to achieve its policy objective: a price stability target of 2%.
- The BOJ has been purchasing risky assets for more than 10 years, and the debate regarding the side effects and its sustainability is extensive. The BOJ’s holdings of exchange-traded funds (ETFs) have reached a market capitalization of 50 trillion yen, and several real estate investment trusts are approaching the maximum amount it can hold.
- While experts and BOJ alumni have presented several proposals for BOJ’s ETF exit strategy, they do not address the challenge regarding which entity, for instance, central bank, government, firms, or households, should absorb the ETF’s capital loss.
- Since 2000, the business diversification rate of Japanese banks has been increasing. However, in recent years, it has had a tendency to level off. Deregulation is expected to lead to the development of new businesses in the future.
- We conducted a questionnaire survey on regional banks, regarding their progress of digital transformation (DX) and future management direction. Respondents said that they would continue establishing new business models, while focusing on improving operational efficiency through DX, optimizing the allocation of personnel, and strengthening problem-solving capabilities.
- Following the methodology of the Dutch central bank, De Nederlandsche Bank (DNB) we estimate the banks’ assets that would become non-performing assets, due to climate-related risk. If climate-related risk materializes, 3 trillion yen of domestic bank loans would become stranded assets, which could reduce the capital adequacy ratio by up to 0.9%.
- To deal with the financial risks posed by climate change, legal frameworks and clear standards for assessing non-financial factors should be developed urgently. Private financial institutions must prepare for the new trend of expanding investment in the Environmental, Social & Governance and the risk of their assets becoming stranded assets due to the transition to a low-carbon society.
- 2023/04/19
-
If the YCC is Lifted, Long-term Interest Rates could Rise to 0.8–1.1%; Aftermath for Businesses and Public Finances
- 2023/04/19
-
Need to revise YCC, but burden on households and banks could increase
1% increase in adjustable mortgage rates increases early repayment probability by 25% - 2022/09/08
-
Investment in CO2 capture technology is key to achieving a decarbonized society
- 2022/08/24
-
The Actual State of Branch Consolidation in Japanese Banks
- 2022/04/27
-
Estimating the impact of the Fed’s monetary policy normalization on long-term U.S. interest rates and the beggar-thyself policy effect on Japan if the BOJ maintains easing policy
