Banks fine but SMEs at risk by Japan's 'historic' policy shift

SMEs may see more challenges from the higher interest rates and higher wages.

The end of Japan’s negative interest rate policy will not materially strengthen its banks’ interest rate margin, says Moody’s Ratings.

However, it will also not contribute meaningfully to declining asset values or a marked deterioration in asset quality, according to Christian de Guzman, senior vice president and manager, Moody’s Ratings.

“Following the Bank of Japan’s exit from its negative interest rate policy and yield curve control framework, we expect interest rates to remain very low and pose limited risks for Japanese credit,” de Guzman said.

On March 19, the Bank of Japan finally ended its negative interest rate policy by lifting rates to 0% to 0.1%. 

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The “historic” move makes Japan the last economy to exit its negative interest rate policy, noted Alvin Liew, senior economist for the UOB Global Economics & Markets Research.

“Upside improvements were cited for corporate profits and business sentiment whilst business fixed investment has been on a “moderate increasing trend”. Overall, the employment and income situation has improved moderately. Housing investment remains relatively weak while public investment has been “more or less flat”. These factors were largely unchanged from the outlook report in Jan,” Liew wrote in a report.

The decision was not unanimous. Monetary policy meeting board member Nakamura Toyoaki had wanted to continue negative rates, noting that small and medium enterprises (SMEs) have the capacity to raise wages.

Moody’s de Guzman also noted the possible negative impact on SMEs, noting their weaker ability to pass on costs from higher interest rates and higher wages.

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Large Japanese companies are expected to do fine even when faced with higher borrowing costs.

“Whilst large Japanese companies may see pressures from potential yen appreciation given expectations of narrowing interest rate differentials with the US, their modest debt levels and strong liquidity provide ample buffers to absorb higher borrowing costs,” de Guzman said.