The BOJ should throw the banks of Japan a bone



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The decisive moment for the Bank of Japan, and the most important question for the markets boils down to this: will policymakers suggest that the side effects of monetary easing begin to worry them?

This question may reside in both geopolitics and economics.

The Bank of Japan is in a corner, especially because it may have to transfer more of its purchases of exchange-traded funds to a broader benchmark like the Topix, and far beyond the Nikkei 225, "an index of Flintsones from an abacus age," according to Nicholas Smith, analyst at CLSA

The real difficulty of the central bank lies in the bond market. Even with negative interest rates (since January 2016) and interest rate curve controls (since September 2016), the 2% inflation target for Japan remains elusive. More worryingly, the impact of these policies now threatens Prime Minister Shinzo Abe's broader gambling plan.

Consider the analysts 'estimate of the consensus of the one-year forward yield of the lenders' assets of the Topix Bank Index. It was 0.39% in December 2015, just before the imposition of negative interest rates. For lenders of the S & P 500 index, the expected return on investment was 0.95% in December 2015, when Donald Trump's surprise victory in the US presidential election was far from over. to be conceivable.

increase their asset yield forecasts for US lenders to 1.2%, while reducing Japanese banks' forecasts to 0.3%. What was a difference in profitability of 3: 1 is now a 4: 1 advantage in favor of Americans

Lenders need a profit scale

Interest rate policy negative has reduced profitability of Japanese banks Bloomberg


Negative interest rates have flattened the ability of Japanese banks to obtain a spread on deposits. If the Bank of Japan does not attempt to build a new profit scale, their ability to generate capital for future growth will be limited; and without this capital, they will struggle to confront Beijing's belt and road infrastructure projects in Asia and beyond.