Japan Regulator Says Not Considering Bank Capital Surcharge

Japan’s financial regulator denied it plans to force the nation’s largest banks to hold more capital than required under Basel III rules, after a person with direct knowledge of the matter told Bloomberg News that talks on whether to apply a capital surcharge will begin soon.

An official at the Financial Services Agency who spoke on condition of anonymity said at a press conference in Tokyo today that the regulator isn’t considering a capital surcharge. The agency will start internal discussions soon on whether to apply a capital surcharge to systemically important lenders such as Mitsubishi UFJ Financial Group Inc., the person familiar with the matter said yesterday, declining to be identified.

A Swiss government-appointed panel said Oct. 4 that UBS AG and Credit Suisse Group AG should hold more capital than required by the Basel Committee on Banking Supervision. Japan’s largest banks may have to cut dividends or raise more capital should the country impose a capital surcharge, Credit Suisse analysts said this week.

“Our leading banks should, in the long run, further increase capital above the Basel minimum level in order to take certain risks, boost lending, and reap higher profits,” Shinsuke Amiya, a Democratic Party of Japan lawmaker who is a member of the Financial Affairs Committee, said yesterday in an interview.

The FSA’s deliberations may last a year or two, the person said. Japanese lenders should be able to achieve the Basel III levels by building internal reserves, according to the person.

Bank Shares Rise

Bank stocks rebounded after the FSA’s briefing. Mitsubishi UFJ, Japan’s biggest lender, climbed 2.8 percent at 2:21 p.m. in Tokyo after earlier declining as much as 1.8 percent. Sumitomo Mitsui Financial Group Inc., the second-largest bank, advanced 1.6 percent and Mizuho Financial Group Inc., the third largest, gained 7.8 percent, heading for the biggest increase this year.

Japan’s three largest banks have raised about 4.5 trillion yen ($54.1 billion) by selling shares since December 2008, bolstering their balance sheets as regulators called for lenders to hold more capital.

The Swiss panel said last month that UBS and Credit Suisse should hold almost double the capital required under the Basel III proposals announced last month. By 2019, the lenders would need to hold at least 10 percent of capital in common equity, compared with 7 percent required under Basel.

The possibility of a global capital surcharge of around 2 percent for the world’s most important banks “cannot be ruled out,” Shinichi Ina, a Tokyo-based analyst at Credit Suisse, wrote in a report this week.

G-20 Meeting

Group of 20 leaders will consider the Basel III proposals and discuss stricter rules for the biggest banks at a summit in Seoul next month.

As well as Switzerland, China is considering more stringent capital requirements than those proposed by the Basel Committee. China’s banking regulator may require the nation’s biggest lenders to boost their capital adequacy ratios to as high as 15 percent by the end of 2012, a person with knowledge of the matter said last month.

Banks worldwide may resist the imposition of any additional capital burden. Extra capital requirements on the biggest lenders would increase the “economic impact” of regulatory reform, the Institute of International Finance, a group that represents 400 firms worldwide, said this week.

Bank of Japan sets course for QE

By Jonathan Soble and Mure Dickie in Tokyo

Published: October 5 2010 06:20 Last updated: October 5 2010 09:31

The Bank of Japan has set a course for “quantitative easing” in a bid to shore up the nation’s faltering economic recovery.

The central bank on Tuesday said it was considering creating a Y5,000bn ($59.7bn) programme to buy assets to increase liquidity in the financial system, as part of a “comprehensive monetary easing policy”.

In recent months, the central bank has come under criticism from the government and many economists that it was responding too timidly to weak demand and falling prices.

In a statement, the bank said it would “maintain the virtually zero interest rate policy until it judges…that price stability is in sight”.

The asset-buying programme would be similar to “quantitative easing” policies adopted by central banks in the US and Europe.

The Bank of Japan said it would look at buying government and corporate bonds, commercial paper, exchange-traded funds and real estate investment trusts.

Japan’s previous experiment with quantitative easing, from 2001 to 2006, involved injecting commercial banks with excess cash.

Chiwoong Lee, an economist at Goldman Sachs, said the aggressiveness of the monetary easing was “a big surprise”.

“They will have tried every monetary policy that is presently conceivable 可想到的, 可想像的; 可理解的; 可相信的,” he said.

The likelihood of new action on monetary policy appeared to increase last month when the central bank signalled that it would not rush to withdraw extra liquidity in the financial system created by Tokyo’s recent yen-weakening intervention in the currency market.

Some analysts were anticipating a more limited expansion of the bank’s cheap three- and six-month credit facilities or greater purchases of government bonds, the one financial asset the bank currently purchases outright.

In its statement the Bank of Japan said: “Although Japan’s economy still shows signs of a moderate recovery, the pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen’s appreciation on business sentiment.”

Japanese industrial production declined 0.3 per cent in August from the previous month, confounding economists who had predicted a 1.1 per cent rise. Meanwhile, the central bank’s quarterly Tankan business sentiment survey found that big manufacturers were pessimistic about the outlook for this quarter.

After the announcement, the dollar climbed from Y83.55 to Y83.90, while 10-year Japanese government bond futures rose slightly. The Nikkei stock average reversed an intra-day decline, ending up 1.5 per cent

BOJ May Raise Growth Forecasts on Export-Led Optimism

By Mayumi Otsuma and Keiko Ujikane

April 8 (Bloomberg) -- The Bank of Japan’s increased optimism about the export-led recovery suggests the policy board may raise its forecasts for economic growth and prices later this month, economists said.

Governor Masaaki Shirakawa told reporters after a policy meeting yesterday that “the economy is currently picking up steadily and on top of that, we are seeing some signs of future progress.” His board, which left interest rates at 0.1 percent and chose not to expand deflation-fighting measures, will review its outlook for the economy and prices on April 30.

“There’s a high chance that the central bank will raise its growth forecast to around 2 percent from its January forecast of 1.3 percent” for the year ending March 2011, said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. in Tokyo. “The recovery in exports is spilling over to domestic demand faster than people had expected.”

Reports since Shirakawa doubled a bank lending program to 20 trillion yen ($212 billion) three weeks ago have shown an uneven recovery: exports rose, along with business and consumer confidence, while machinery orders, consumer prices and wages continued to fall. The bank won’t rule out further monetary easing amid pressure from the government to tackle deflation ahead of a July election, said economist Yoshimasa Maruyama. “Raising the growth forecast means the BOJ doesn’t think more easing policies are necessary,” said Maruyama, senior economist at Itochu Corp. in Tokyo. “But it’s still possible that the bank will be forced to implement them because of political pressure before the election.”

‘More Self-Sustained’

Shirakawa said yesterday that the central bank “advanced our economic assessment by one step because the economy’s pickup is becoming more self-sustained and concerns about a double dip have pretty much gone.”

The Nikkei 225 Stock Average has risen 11 percent since the end of February on speculation the recovery will last. It slipped 0.7 percent at 10:06 a.m. in Tokyo. The yen has weakened 3 percent in the past month, improving the earnings outlook for exporters such as Honda Motor Co. and Canon Inc.

BOJ officials cited exports as a driver of the expansion in yesterday’s statement, after describing stimulus measures as the main reason for the rebound in previous months. “High growth in emerging economies” is propelling shipments and production, the central bank said, while adding that beating deflation remains a “critical challenge.”

Still Reluctant

Companies are still reluctant to ramp up spending in the wake of the country’s worst postwar recession, a government report showed today. Machinery orders, an indicator of future business investment, slid 5.4 percent in February from January, a second monthly decline, the Cabinet Office said. It kept its view that orders are “leveling off” after slumping to a record low in November.

Maruyama at Itochu estimates policy makers will raise their growth outlook for the year ending March 2011 to the “upper 1 percent range” in this month’s semiannual review. In January, the bank affirmed forecasts of an 1.3 percent expansion this year and 2.1 percent in fiscal 2011.

It also said consumer prices would slide 0.5 percent this fiscal year and 0.2 percent in the year ending March 2012. BOJ officials may say next fiscal year’s price changes will approach zero percent, a person familiar with the matter said last month.

Price Upgrade

Economists including Murashima and Norio Miyagawa say the prospect of faster growth and a narrower gap between supply and demand means such an upgrade is possible. “Rising commodity prices may also be taken into account,” said Miyagawa, a senior economist at Shinko Research Institute in Tokyo. “There was a prevailing view that Japan’s core prices wouldn’t resume rising until fiscal 2012, but the perception is changing,” said Hideo Kumano, a former BOJ official and now chief economist at Dai-Ichi Life Research Institute in Tokyo. “Deflationary pressure on the economy is easing.”

Even so, political pressure on the central bank continued last week as about 100 legislators of the ruling Democratic Party of Japan formed a group to urge the bank to act on deflation. The bank’s March credit expansion came after Finance Minister Naoto Kan urged it to act. “Expectations for further policy easing remain strong in financial markets and those folks cite political pressure to call for an early end to deflation,” said Naka Matsuzawa, chief investment strategist at Nomura Securities Co. in Tokyo.

Deflation Effects

Consumer prices excluding fresh food, the BOJ’s preferred measure, declined for a 12th month in February. Deflation can erode profits, prompt companies and consumers to delay spending, and increase the real value of debt.

The government is relying on the BOJ as its ability to stimulate demand with fiscal spending is limited by record public debt. Kan and National Strategy Minister Yoshito Sengoku are working on a strategy for repairing the nation’s finances.

“The next significant move is still likely to be a further loosening,” said Julian Jessop, chief international economist at Capital Economics Ltd. in Tokyo. Monetary easing “will be needed if the government’s medium-term fiscal plans, due to be announced in June, make a serious attempt to tackle the huge holes in the public finances.”

China Property Bust May Prove Temporary, BOJ, UBS Analysts Say

By Mayumi Otsuma

March 31 (Bloomberg) -- China’s stage of economic development means any property-market bust following the current boom may prove temporary, according to economists at the Bank of Japan and UBS AG.

China today shares characteristics of Japan’s real-estate boom of the 1970s, when the nation quickly recovered from a slump, according to a Bank of Japan research paper. The Chinese economy will be able to keep expanding even in the event of a property contraction, said UBS’s Beijing-based Wang Tao.

The view contrasts with that of Kenneth Rogoff, the Harvard University professor who said last month China may see growth plunge to as low as 2 percent in the aftermath of the collapse of a “debt-fuelled bubble” within 10 years. Premier Wen Jiabao is trying to rein in property speculation after prices rose the most in almost two years.

“People tend to compare China with Japan in the late 1980s but the two situations are very different,” Wang, the head of China economic research for UBS, said in an interview last week. “The biggest difference is of course that China is still at a low stage of development, so if there is a big correction it still has the potential to grow out of it.”

Economic growth of almost 10 percent, surging incomes and a rapid flow of people into cities spurred “real demand” for housing and boosted property prices in Japan in the 1970s, similar to China today, according to the paper co-written by four BOJ economists.

Parallels With Japan

The parallels also include a low ratio of debt used to buy homes, the Japan central bank officials said in the paper released yesterday. Wang also said the lack of a mortgage- securities market in China means property buyers aren’t borrowing as much as Americans did during the U.S. housing bubble.

Property prices in Japan rebounded “pretty quickly” after plunging in 1974 amid the global oil shock, because brisk economic growth fueled incomes, the officials said. In contrast, Japan’s asset-price collapse at the start of the 1990s drove the country into prolonged doldrums because urbanization was almost complete and growth slowed.

Japan’s experiences show “the depth of the property-market adjustment would differ depending on the stage of economic development,” the economists said. “Given its high potential growth and low leverage, China won’t likely suffer a severe property-market adjustment, like the one Japan went through in the 1990s.”

Development Stage

Growth in Japan averaged 9.3 percent in the decade through 1973, compared with 9.9 percent in China between 2000 and 2009, according to the paper. About 45 percent of Chinese currently live in urban areas, the same level as Japan in the early 1960s, it said. Per-capita gross domestic product in China, the world’s fastest-growing major economy, is about $3,500, similar to Japan’s $3,800 in 1973.

Wang also said the possibility of a “boom-bust is quite high” and “avoiding a property bubble in China will be very, very difficult.”

Rogoff, the former International Monetary Fund chief economist, said in an interview in Tokyo last month that land is “the best bet” for the cause of a China crisis. A collapse would cause a “very painful” period which would persist for about a year and a half, while falling short of a 1990s Japan-style lost decade, he said.

Local Authorities

Local governments in China are aggressively developing properties to boost revenues and are welcoming market rallies, the BOJ report said. The paper was written by Ichiro Muto, Tomoyuki Fukumoto, Miyuki Matsunaga and Satoko Ueyama, all economists at the bank’s international department.

Capital inflow from overseas is also providing short-term speculative money, the report said.

Bank lending in China also draws parallels with Japan in the 1970s. Loans by Chinese banks equal between 110 percent and 120 percent of nominal gross domestic product, the same level as Japan around 40 years ago, the researchers said. The ratio jumped to around 180 percent in the 1980s in Japan.

“During Japan’s bubble economic boom in the 1980s, real- estate prices rose without real demand for houses related to urbanization,” the BOJ paper said. “That makes a difference from the booms in Japan in the early 1970s and China today.”