Japanese banks' profitability to deteriorate at a slower pace

The gap between interest rates on existing loans and those on new loans is narrowing.

Moody's reported that the three-month TIBOR and long-term prime rate, key benchmarks for loan rates in Japan, have stopped declining and stabilised since September 2016 when the BOJ introduced so-called yield-curve control to keep long-term rates from falling below zero.

"Japanese banks' NIMs will still continue to decline, as they roll over more loans at lower rates than their original rates and loan competition remains intense. Also, the repricing of maturing securities at significantly lower rates will pressure net interest income at some regional banks that rely on those holdings for interest income relatively heavily due to weak loan demand in their markets," Moody's said.

However, the pace of a further deterioration of Japanese banks' NIMs and their overall profitability will likely slow, because the gap between interest rates on existing loans and those on new loans is narrowing as market rates stabilise.

"Nevertheless, NIMs will not start widening soon because the BOJ will not raise rates nor end quantitive easing until it meets the 2% annual inflation target sustainably," added Moody's.