Negative rates failed to boost Japan bank lending in March

[TOKYO] Japanese loan growth slowed to the weakest pace in three years in March, signaling the central bank's introduction of negative interest rates has yet to spur credit in the world's third-largest economy.

Loans excluding trusts rose 2 per cent from a year earlier, slowing from 2.2 per cent in February, the Bank of Japan said Tuesday. Deposits increased 3 per cent, easing from 3.1 per cent in February.

The figures are the first for a full month after the BOJ began charging lenders 0.1 per cent interest on some of their reserves on Feb 16.

The policy has put pressure on lenders' profitability because they are being forced to lower interest rates on loans more than those on deposits. Bank shares are the worst performers on the benchmark Topix index this year amid speculation that the central bank will cut rates further to stem an 11 per cent gain in the yenagainst the dollar, which threatens to undermine an economic recovery.

"Putting aside deciding whether the policy is a failure after just one month, we were quite skeptical as to whether negative rates would boost loan demand,'' said Takashi Miura, a Tokyo-based analyst at Credit Suisse Group AG.

"Home lending will come back if rates settle and demand grows, but we'll need to see an increase in corporate loans to get back to the 2.5 per cent levels we've seen lately,'' he said, referring to overall loan growth.

More Cuts?

BOJ governor Haruhiko Kuroda told lawmakers on March 16 that it would be "theoretically possible" to reduce rates to as low as minus 0.5 per cent. Standard & Poor's estimated in February that negative rates will erode the profitability of regional lenders by 15 per cent and major banks by 8 per cent.

The average rate on all new loans at the nation's banks plunged to a record-low 0.793 per cent in February, central bank figures show.

Banks including Mitsubishi UFJ Financial Group Inc have cut rates on ordinary yen deposits to just 0.001 per cent. That would pay the equivalent of just US$10 in annual interest on a US$1 million balance.

While banks have resisted passing on the costs of negative rates to most depositors, a few have indicated they will charge some institutional customers.

Sumitomo Mitsui Financial Group Inc is planning to impose fees on foreign banks for some of their cash held in yen-denominated accounts. Trust banks are considering fees on trust accounts of some institutional investors.

BLOOMBERG