Have Japan’s big banks benefited from ‘Abenomics’?

Bloomberg News Online reported on November 15, 2013 that several of Japan’s largest banks, including the three largest ones such as Mitsubishi UFJ Financial Group (MUFJ), Inc., Sumitomo Mitsui Financial Group Inc (SMFG), and Mizuho Financial Group Inc. (MFG) have forecasted an increase in their combined net income target by 23.0 percent to Japanese Yen (JPY) 2.26 trillion (USD 23.0 billion) for the fiscal year ending March 2014. This is according to their latest first half company statements. If these forecasts meet expectations, second-half profits might fall by approximately 46.0 percent to JPY 794.3 billion from the first six months’ JPY 1.47 trillion and drop 43.0 percent from a year earlier.

The forecasted second-half profit declines announced by the three banks are examples of some of the concerns expressed by many Japanese corporations, especially those coming from the financial sector, that there are lot of pessimists out there regarding the impact of ‘Abenomics’ (economic policies formulated by current Prime Minister, Mr. Shinzo Abe) on the overall economic growth, and the effectiveness of the so-called ‘Third Arrow’ (structural reforms; the remaining two arrows are fiscal and monetary reforms) that has been slow in terms of policy implementation process. So far, Abenomics has only secured success wins out of the fiscal and monetary reforms coming namely from seeking Parliamentary approval for the expected consumption tax increase from the current 5.0 percent to 8.0 percent by April 2014, and reduction in government spending coming from the fiscal front. As for the monetary reforms, the Bank of Japan (BOJ) has vowed to continue their bond purchases and quantitative easing (QE) measures in a bid to reach its inflation target of 2.0 percent. So far, data releases for the past few months have been showing signs of inflationary growth, a possible indication that the monetary reforms are progressing relatively well. However, the structural reforms including the low birth-replacement rates, an increasing aging population, and immigration policies, among others that constitute the ‘Third Arrow’ have not shown much progress, and this are some of the worrying trends as financial corporations seek out for loan growth through corporate spending, and maintain the continuing robustness of Japan’s economy.

Many analysts which Bloomberg News spoke to have expressed their scepticism over the success of Abenomics as their concerns are mostly centred on the impact of Abenomics might have on corporate capital expenditures, and business loan applications going forward. On November 11, 2013, according to data released by the BOJ, shows total bank lending for the month of October 2013 stood at approximately 2.03 percent, not far from the September 2013 rate of 1.96 percent. On a year-to-date (YTD) trend growth, loan growth has decelerated a flat line. The Japanese banks need to accelerate loan growth in order to offset the low net interest margins (NIM)) they are experiencing, along with the depressed interest rate environment. According to Bloomberg News, NIM growth at Japan’s three largest banks (MUFJ, SMFG, MFG) averaged 1.0 percent, and it is considered one of the lowest based on historical trend.

Several key economic data released on November 14, 2013 have shown several mixed results on the effectiveness of Abenomics. Annualised Gross Domestic Product (GDP) came in at 1.90 percent during the third quarter of 2013, beating the Thomson Reuters consensus estimates of 1.70 percent. However, this is also a decline from the 2.60 percent during the second quarter this year. Japan’s Tankan (corporate sentiment) survey came in at 14.00 for the month of November 2013, up from the previous month of 12.00. Machinery orders data released on November 13, 2013 indicated a slight miss of 11.42 percent from the consensus estimates 12.60 percent for the month of September 2013. Separately, on November 15, 2013, a corporate-wide survey data of 247 Japanese corporations was released by Thomson Reuters, showing a general positive agreement about Prime Minister Abe’s policies have so far on the economy through the fiscal reforms being put in place to help bolster the country’s economic growth, and the monetary reforms coming from the BOJ which helped to contain the rise of the Japanese Yen currency against major currencies, and boosting overseas exports. However, most of these Japanese corporations whom Thomson Reuters have surveyed expressed their apprehension over their capital expenditure plans, citing uncertainties over corporate tax reforms which many have lobbied for in the past, but was not being outlined as part of Prime Minister comprehensive tax reforms announced in September 2013. There are growing concerns expressed by many Japanese corporations that Abenomics is slowly watered down, and might not be enough to encourage corporate spending. This is shown in many of the recent capital spending data showing growth of merely 0.2 percent during the period of July-September 2013, and the latest machinery orders data.

In relation to the current and expected weak corporate spending, the Japanese financial corporations are increasingly facing a saturating loan growth environment. There is an urgent need from the Japanese government to work on the structural reforms in order to spur the overall economy. The demographic issues have long been deferred by the Japanese government, but many have expected that Prime Minister Abe and his cabinet will act decisively on this issue urgently in order to keep the economy on track for positive growth. It is expected to be a challenging task for Prime Minister Abe to work on the structural reforms immediately as many Japanese leaders before him have not found much success in tackling the aging demographics issues. With approximately a year in office, there are increasing expectations that the Japanese government might announce another set of reforms that will increase corporate spending, however it still remains to be seen whether the Prime Minister has acknowledged the growing concerns expressed by many Japanese corporations, including the financial sector regarding the timing of the implementation of comprehensive corporate tax reforms.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

2 thoughts on “Have Japan’s big banks benefited from ‘Abenomics’?

  1. Pingback: Have Japan’s big banks benefited from &ls...

  2. Although several Bloomberg News Online reports including a report describing an upsurge of corporate profits that have benefited from ‘Abenomics’, however, the impact of such policies that arise out of ‘Abenomics’ is expected to result in different beneficial returns among many Japanese corporations. For example, certain sectors of the economy such as manufacturing might benefit from the ongoing monetary reforms, or the so-called ‘Second Arrow’ of Abenomics, but most of what was envisioned for the ‘Third Arrow’ which are the structural reforms are still not quite clear, or so-called ‘set in stone’ yet when policies are implemented. I have seen news reports that cited the critical and urgent issue of unleashing a widespread and comprehensive reform package, along with implementation timelines that revolves around the theme of structural reforms agenda, but so far, that has not been forthcoming, resulting in much hesitance among Japanese corporations, such as the financial sector to expand, as they are also equally concerned about corporate tax adjustments, among others. The corporate tax reforms have not been fully addressed yet, and still have more work to do on proposing and implementation of much needed reforms on the structural side of the overall ‘Three Arrows’ policies.