As Japan emerges from deflation, banks get wake-up call on interest rate swing

Daiwa Securities

05/12/2023 02:00

* 
      Banks say mindset change needed to capitalise on higher
rates
    

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      MUFG Bank held over 70 study sessions for front-line
bankers
    

        * 
      Overbanking issues may delay increases in bank lending
rates 
    

  
    By Makiko Yamazaki and Ritsuko Shimizu
       TOKYO, Dec 5 (Reuters) - After decades of deflation,
Japan's economy looks poised to finally turn a corner. For its
biggest banks, however, there's a hitch: a generation of
professional front-line staff have little experience with rising
interest rates.
    Lenders in the world's third-largest economy are now giving
crash courses to younger staff to help clients navigate higher
interest rates as many of these employees have no expertise in
dealing with the vagaries of a traditional inflation
environment.
    The historic shift to an inflationary environment from
decades of falling prices that stretch back to the 1990s
presents something of a wake-up call for Japan's major banks,
senior bankers say in private, warning that lenders need to
change the mindset of their staff or risk losing out on
opportunities.
    The last time Japan ended zero interest rates was in 2006,
"so for most of our front-line bankers this is the first time to
deal with clients amid rising rates," Masahiro Minami, CEO of
No. 4 lender Resona Holdings  8308.T , told Reuters in an
interview.
    "We'll need to carefully watch how our clients would change
their behaviour at what speed, and we need to be prepared to
respond to those changes," he said.      
    Hopes that banks will benefit big from an end to deflation
have sent the Tokyo banking index to its highest in 15 years
this year. 
    The industry has long moaned quietly that the central bank's
massive stimulus crimped their earnings. Shackled by zero rates
at home for years, big banks have expanded overseas lending and
investment in complex financial products in their hunt for
yields.
    While it remains to be seen whether banks will be ready to
capitalise on higher rates, they've been preparing for them by
tapping the expertise of veteran money market specialists like
Izuru Kato. 
    Kato, who heads the think-tank arm of major money market
brokerage Tokyo Tanshi, has been called upon frequently by
various banks, sometimes multiple times a week, to talk how
short-term money market was before the Bank of Japan's monetary
easing steps and how it would be when these steps are removed.
    "Requests from banks for such meetings or seminars started
to come about a year ago, but the number has surged since
October," when the BOJ further loosened its grip on long-term
interest rates, he said.
    
    STUDY SESSIONS, SEMINARS
    MUFG Bank, Mitsubishi UFJ Financial Group's  8306.T  core
banking unit, has held more than 70 study sessions for
front-line bankers this year on how to support clients when
interest rates swing.
    The top Japanese lender also set up a sales support team in
April for yen interest rate derivatives, a product likely to see
an upswing in demand in an inflationary environment.
    In June, it started an internal messaging channel to deliver
yen interest rate-related sales and market information to about
1,200 bankers subscribing to it. It also plans to offer crash
courses to new graduates starting their career in April.
    Similarly, Resona in recent months held online seminars for
hundreds of managers, mainly branch chiefs, to help them brush
up how higher interest would impact balance sheets of their
clients and their own, with the idea that they would then go
back to their branches and pass on the information.
    Among investment banks, Daiwa Securities  8601.T  created a
new department within its trading division in April. The 38
members, which include credit dealers and data scientists, work
to improve coordination between retail and wholesale divisions,
as higher rates are expected to fuel trading activities.
    "Japan is at a turning point for the first time in 30
years," Satoru Yamamoto, the head of the new department told
Reuters. "As the yen interest rate environment normalises, it
would be natural for us as a Japanese brokerage house to shift
focus to our main home-country products - Japanese stocks and
bonds."
    Atsushi Kikuchi, an executive at Mizuho Financial Group's
 8411.T  trust banking arm, said he already sees his pension
fund clients adjusting their investment portfolios, coming back
to long overlooked yen-denominated bonds from once popular
currency-hedged foreign bonds.
    The banks declined to say how much they were spending.
    "I'm feeling pretty excited because the healthy rate
environment creates various opportunities for us," said one
Mizuho banker in his 30s.
    Still, if higher rates are new to most bankers, so they are
for their clients, who have for years enjoyed rock bottom rates
in Japan.
    Tokyo Tanshi's Kato, the money market veteran, said Japan's
overbanking problem, with excess banking capacity, could make it
difficult for banks in highly competitive regions to reflect
changes in policy rates on their lending rates.
    "Almost no front-line bankers have experienced short-term
rates above 0.5% as Japan last saw such rates in the 1990s," he
said. "I think there are a lot of scepticism among front-line
bankers over whether they can really increase their lending
rates."

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Average contract interest rates on outstanding bank loans in
Japan    https://tmsnrt.rs/46CDUsB
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 (Reporting by Makiko Yamazaki and Ritsuko Shimizu; Editing by
David Dolan and Shri Navaratnam)
 ((Makiko.Yamazaki@thomsonreuters.com; +81-3-4563-2805;))