Aug 19, 2013
Tokyo, August 14th 2013 - Moody's Japan K.K. says that ending deflation and achieving sustainable nominal GDP growth would be credit positive for Japan's domestic banking sector.
In this context, one of the keys to revitalizing growth is increased private sector capital formation, which in turn should invigorate financial intermediation between savers and borrowers, the core function of the banking sector. The result would be an increase in lending.
Moody's conclusions were contained in a just-released report, titled Japan's Banks Would Benefit From Sustainable Growth and an End to Deflation. The report is part of a Moody's series examining the impact of Abenomics.
Loan demand would be further strengthened by a return to inflation which increases the incentives for investors to finance fixed capital formation through greater borrowings rather than cash on hand.
Among the likely effects of a successful implementation of Abenomics, increased economic growth and a return to inflation would have the most lasting credit-positive effects on the banking sector.
The positive effects would include -- as indicated -- the increase in loan growth and higher earnings from widening deposit-loan spreads. Such spreads are currently depressed by the deflationary environment and intense competition among banks for creditworthy customers.
In contrast, if the revitalization strategy fails to stimulate growth, the government's debt burden will continue to rise, which could erode confidence in the JGB market. Currently, private sector savings are largely invested in domestic bank deposits, which the banks, in turn, invest into the JGB market.
Any loss of confidence -- that saw a reluctance by the private sector to hold its savings in the banking sector -- would make it difficult for banks to keep funding the government deficit. Such a scenario, which is not Moody's central expectation but a plausible downside risk, would destabilize both the JGB market and the banking sector, potentially leading to a financial crisis.
Re-disseminated by The Asian Banker