Japan bank executive says mergers won't fix woes brought by BOJ policy

By Leika Kihara

FUKUOKA, Japan (Reuters) - Japan's ultra-loose monetary policy is making it tough for commercial banks to earn profits out of lending, a problem that cannot be fixed through bank mergers, the influential chairman of a major regional bank in southern Japan said.

Isao Kubota, chairman of Nishi-Nippon City Bank and once a finance ministry colleague of Bank of Japan Governor Haruhiko Kuroda, praised the BOJ chief's massive stimulus program for correcting a damaging yen spike and revitalizing the economy.

But Kubota said the length of the stimulus program is causing some problems, including hurting financial institutions' profits for years due to low interest rates.

Extraordinary monetary steps, such as Kuroda's massive asset-buying program and negative interest rates, could be useful and effective as "short-term, emergency" measures, Kubota told Reuters on Monday.

"But the longer the policy continues, the worse the side effects become," he said. "We are in the sixth year of this policy and, I think intuitively, the accumulation of the side-effects might be enormous."

Many Japanese regional banks are grappling with diminishing returns from traditional lending as years of ultra-low rates hurt their bottom line and a dwindling population triggers an exodus of companies to bigger cities.

While Japan's banking lobbies have complained about the pain from the BOJ's policies, financial regulators have urged regional banks to cut costs and find new ways to make money.

Some BOJ officials have said mergers could be among options for regional banks to beat a deteriorating business environment.

BIGGER PROBLEMS

But Kubota argued that simply prodding regional banks to merge won't solve a bigger problem created by the BOJ's yield curve control (YCC) policy, which caps long-term rates at zero.

"Regardless of whether (the BOJ) intends to do so or not, they are squeezing the profits of commercial banks," Kubota said of YCC's impact on bank profits.

"The other side of the coin is that, this kind of phenomenon is never resolved through, for example, mergers of banks. By nature, because of this policy, banks as a whole are made unprofitable."

Under YCC, the BOJ now pledges to guide short-term rates at minus 0.1 percent and the 10-year bond yield around zero percent. The policy has made it tough for banks to profit from traditional business of borrowing short-term funds and lending them at higher yields.

"We want an early stoppage to this kind of policy. That we can say. But we can't say what the authorities should do," Kubota said, when asked whether commercial banks would be better off if the BOJ abandoned negative rates. "They have powers, authorities. They also have responsibilities for the outcome of their policy."

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Despite the mounting challenges to achieving 2 percent inflation, Kuroda won't abandon his target, said Kubota, who thinks he sees the governor's way of thinking "very well" as former colleagues.

Both studied under prominent economists at Oxford University as graduate students dispatched from Japan's Ministry of Finance.