Japanese bank woes to persist as ultra-low rates to last until 2020

The negative rates will continue to eat away at profitability.

The worries of Japanese banks have yet to abate as the central bank has pledged not to raise interest rates before spring 2020 in the first time it has marked a specific time period by which it intends to keep rates low, reports Nikkei Asian Review. 

The move signals growing concern from the Bank of Japan about slowing growth and failure to meet inflation targets.

“The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, at least through around spring 2020, taking into account uncertainties regarding economic activity and prices,” the central bank was quoted in FT.

Also read: Japanese banks hit by lower net interest income as loan demand dwindles

The ultra-low rates engineered by the BoJ have been eating away at the profitability of its lenders who struggle to turn a profit from their significant loan balances, especially regional banks who generate 85% of their profit from net interest revenue.

Also read: Struggling Japanese regional banks go over the edge to cut losses

Banks are also grappling with a shrinking customer base and dwindling loan demand as the country rapidly ages with the proportion of the population aged 65 and above set to account for a third of the population by 2030, according to UN projections. 

A rapidly ageing country presents a challenge to banks as retirees tend to draw down in savings and less risky investment products unlike younger populations that use more expensive banking products.