Oct 23, 2013
Tokyo, October 17th 2013 - Moody's Japan K.K. says that the outlook on the Japan banking system remains stable, reflecting the presence of modest but above-trend economic growth, which we expect to continue for the coming 12-18 months.
Furthermore, Moody's expects some positive impact on Japan banks over the next 12-18 months from "Abenomics" -- the popular name for the Japan Revitalization Strategy of Prime Minister Shinzo Abe -- as well as from the Bank of Japan's (BOJ) new phase of monetary easing, which is aimed at ending a decade and a half of deflation and achieving a 2% inflation rate within two years.
Moody's conclusions were contained in its just-released "Japan Banking System Outlook", which expresses Moody's expectation of how bank creditworthiness will evolve in this system over the next 12-18 months.
The report looks at the banking system in the five categories of operating environment; asset quality and capital; funding and liquidity; profitability and efficiency; and systemic support. Moody's assesses each category as stable, while the overall stable outlook for the banking system has been effective since 2012.
Moody's forecasts Japan's real GDP growth to be in the 1.0%-2.0% range in 2013 and 2014 with unemployment remaining low in the 4.0%-5.0% range, both of which will support the prevailing stable operating environment.
If the policies of the Abe government -- which was elected in December 2012 -- succeed in sustainably increasing the country's growth rate and inflation, the Japanese banking system will benefit as (1) banks will have more opportunity to lend, thereby reducing their exposure to Japanese government bonds (JGBs), and (2) the health of their corporate clients will improve.
On the downside, if the policies fail to increase Japan's growth rate and if yields rise significantly, Japanese banks could see their capital hit by mark-to-market losses on their holdings of JGBs. However, capital positions are ample enough for banks to absorb potential losses associated with even a sharp rise in yields.
Another potential risk is the recent rapid expansion of international lending by Japanese mega-banks, although their activities overseas have so far been more profitable than domestic lending, and asset quality appears benign.
According to the report, Japan banks' profitability is likely to stay low as the current low interest rate environment will persist as a result of the BOJ's monetary easing policy. However, the banks' strong liquidity and improved capital mean that they are relatively well protected against confidence shocks in what is likely to remain a volatile global financial environment.
Moody's also says that the stable outlook on the Japan banking system is consistent with the stable outlooks on individual Japan bank ratings -- except Citibank Japan's ratings which have been on review for upgrade since August 26, 2013 -- as well as the Government of Japan's (GOJ) Aa3 rating.
The average Japan bank deposit rating has stabilized at A1/Prime-1 since August 2011 when Moody's downgraded the GOJ's rating to Aa3 from Aa2.
Moody's rates 33 banks in Japan. Moody's rated universe covers approximately 70% of total system assets. Three mega-bank groups controlled about half of total system assets at end-March 2013.
Re-disseminated by The Asian Banker