Industry Rakes in Over 1 Trillion Yen Amid Government and Bank of Japan Turmoil

During the era of “negative interest rate policy,” the interest on excess reserves was the policy interest rate.

Personally, I believe that when the Bank of Japan raised rates at the end of July, it would have been sufficient to keep the interest on excess reserves at 0.1%. I anticipate the following counterarguments:

• If the interest on excess reserves is set lower than the policy interest rate, which is the uncollateralized overnight call rate, then the effective policy interest rate will become the interest on excess reserves.

→ This is true, but it is not particularly problematic. During the period of “negative interest rate policy” (up to March 2024), the policy interest rate was effectively the interest on excess reserves. It would be acceptable to either revert the interest on excess reserves back to the policy interest rate or not.

• If the Bank of Japan cannot guide the uncollateralized overnight call rate to its target of 0.25%, it will raise questions about the effectiveness of its monetary policy and undermine its credibility.

→ This too can be understood when considering the enormous excess reserves. Before the introduction of the negative interest rate policy, when the interest on excess reserves was 0.1%, the uncollateralized overnight call rate frequently fell below 0.1%, but this did not become a problem. If we are discussing the credibility of the Bank of Japan, the deterioration of its balance sheet would be a far more serious issue.

 

The question arises whether “subsidies funded by the public burden” are permissible even for the most profitable mega banks.

Some argue that this could be a way to restore the balance sheets of banks damaged by the negative interest rate policy. Perhaps this is the real reason.

However, if we look at the U.S. situation, where the policy interest rate has been raised multiple times in a short period and an “inverted yield” has persisted—where long-term rates are lower than short-term rates—then it makes sense. This scenario has significantly impacted banks, leading to the collapse of several regional banks in the U.S.

In contrast, domestic banks show a completely different picture. While second-tier regional banks are struggling, the earnings of first-tier regional banks have improved considerably in recent years. The mega banks have reported record profits for the fiscal year 2023, with Mitsubishi UFJ Financial Group (FG) and Sumitomo Mitsui FG achieving record highs, and Mizuho FG nearly reaching its highest profit. The combined net profit of these three banks exceeds 3 trillion yen!

Looking at the breakdown of excess reserves, urban banks account for an overwhelming share, surpassing 200 trillion yen. This means that the interest income from excess reserves for the five banks, including the mega banks and Resona Bank, amounts to 500 billion yen (with most coming from the three mega banks). This is where profits that come with a public burden could be provided.

Moving forward, will the Bank of Japan continue to grant interest on excess reserves equivalent to the policy interest rate target, like other central banks abroad? Or will there be a correction at some point? The next monetary policy meeting of the Bank of Japan is scheduled for September 19 and 20. I sincerely hope questions will be raised to the Bank of Japan’s governor during the press conference.