The Covid-19 pandemic has taken its toll on Japanese politics. Prime minister Yoshihide Suga’s decision last week to withdraw from the ruling Liberal Democratic party’s leadership race and step down after just a year in the premier post was attributed to his inability to control the Covid-19 outbreak, which resulted in plummeting popular support.
Yet things were beginning to improve on the economic front. Despite the state of emergency in Tokyo, Osaka and other areas from April to June, the country recorded a higher-than-expected gross domestic product increase of 0.3% in the second quarter of 2021, equal to an annualised pace of 1.3%.
Many hope that a change in political leadership could usher in a new economic stimulus package, which would help support a stronger economic recovery and the banks. However, the banking industry also has to contend with Japan’s short-term rates, which remain at -0.1%, making it the only Asian economy to have a negative interest rate since its introduction in January 2016, according to an S&P report entitled ‘Japanese regional banks’ low profitability may persist amid low rates which has impacted bank profitability’.
The report goes on to say that the country’s megabanks, such as Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Mizuho Financial Group, have been facing weakening credit quality among domestic borrowers, having reported the highest non-performing loan ratios in more than three years for the first three months of 2021.
Despite the various challenges the banking industry faced during 2020, many of Japan’s largest institutions included in The Banker’s Top 1000 World Banks were able to expand their asset base. The 87 Japanese lenders listed in the 2021 ranking increased aggregate assets by 7.4%, while only seeing a slight drop in pre-tax profits (-2%).
Clearly, however, Japan has not seen the immense expansion in banking assets that its regional rival China has over the past decade. The Banker’s Top 1000 World Banks data shows that in 2011 Japan had 102 banks in the ranking with aggregate assets of $12tn, while China had one less bank and about $11tn in assets. In 2012, China took the lead, adding three banks to the ranking and increasing its aggregate assets by 23%. Today, China has 144 banks in the Top 1000 and holds more than double the amount of assets ($37tn) as Japan.
Can Japan’s banks find a path to higher growth? An amendment to the Japanese Banking Act, expected to take effect from November 2021, aims to provide banks with more flexibility to operate domestically and overseas. However, according to Fitch Ratings, the changes are likely to have only a limited impact on banks’ business models and earnings over the medium term.
Trends identified using The Banker Database, an online database providing comprehensive financial data and insight for 4000 of the world’s leading banks in 190 countries. Contact us.
