August 26, 2019 / 9:03 AM / 21 days ago

Japan's regulatory chief urges BOJ to consider impact of easing on banks

TOKYO (Reuters) - The Bank of Japan is responsible for deciding whether to ramp up stimulus to support the economy, but should weigh the impact its monetary policy will have on the banking sector, the country’s top financial regulator said on Monday.

Men work on the outside of the Bank of Japan building in Tokyo, Japan January 15, 2018. REUTERS/Kim Kyung-Hoon

There is mounting speculation the BOJ may be forced to join other major central banks in expanding stimulus as early as next month to protect economic growth as the U.S.-China trade war continues to drag on Japan’s export-reliant economy.

Toshihide Endo, commissioner of the Financial Services Agency (FSA), said sliding global bond yields and the BOJ’s prolonged ultra-loose monetary policy were only among various factors weighing on regional banks’ profits.

Structural woes, such as a shrinking population, were also exerting pressure on Japan’s regional banks to revamp their business models into those less reliant on traditional lending, Endo said.

“Regional banks shouldn’t blame other people for their woes. They should take the current business environment as a given in thinking about what they need to do,” he told Reuters.

When asked whether regional banks should take the same approach if the BOJ were to ease monetary policy further, Endo said: “Yes, that’s basically the case.”

But he added that in deciding monetary policy, the BOJ will likely scrutinize the potential side-effects of its policy, such as the pain it inflicts on financial institutions, using data provided by the FSA.

“The BOJ must think about various things if it were to maintain or expand its stimulus policy,” Endo said.

Under a policy dubbed yield curve control (YCC), the BOJ guides short-term interest rates at -0.1% and allows the 10-year government bond yield to move roughly 40 basis points around its 0% target.

The uncertain global economic outlook has heightened investor appetite for safe-haven assets, briefly pushing Japan’s 10-year yield to -0.285% JP10YTN=JBTC, a near all-time low and below the -0.2% level seen by markets as the BOJ’s line in the sand.

While the decline in long-term yields adds to strains for financial institutions, the BOJ has few effective tools to put a floor on yields.

BOJ Governor Haruhiko Kuroda has said the central bank won’t hesitate to expand stimulus if needed to stave off risks to the economy. But easing policy, such as by cutting interest rates, would intensify the pain on banks.

Endo said the recent decline in bond yields won’t have an immediate and direct impact on financial institutions’ operations but they add pressure on regional banks to speed up efforts to revamp their business models.

“Banks can no longer do business the old way,” he said.

Financial innovation could also upend the way commercial banks do business, and how policymakers regulate financial institutions, Endo said.

Group of Seven finance leaders last month raised concerns about Facebook’s (FB.O) planned Libra digital currency, saying its wide reach and potential to be used for settlement could weaken their control over monetary and banking policies.

“It could pose a threat to existing financial regulation and central banking,” Endo said of Libra. “We must seriously think about how these disruptive technologies could change the way we financial regulators guide policy.”

Editing by Jacqueline Wong

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