Report Summary
The latest on Japan's real GDP growth is discussed at length later in this report As expected, Japan's real GDP growth slowed to an annualised rate of 2.4% in Q107, from a revised 5.0% (down from 5.5%) rate in Q406. This took overall expansion in FY2006/07 (April-March)
On a quarter-on-quarter (q-o-q) basis, the economy grew by 0.6% in Q107 versus 1.2% in Q406. The deceleration was entirely predictable, given that 5.0-5.5% is unsustainable for a mature economy such as Japan, but the 2.4% outturn was slightly below market expectations of 2.7%. Still, the 2.4% increase was roughly in line with Japan's potential growth rate.
The main reason for the weaker-than-
Indeed, Japan's exports to the US rose by only 2.4% year-on-year (y-o-y) in March. Nonetheless, shipments to China and Europe were up by 15.1% and 13.7% y-o-y, respectively. Significantly, China (even excluding Hong Kong) overtook the US as Japan's largest trade partner in FY2006/07. Overall, we believe that Asia's strong growth can make up for a minor slowdown in the US. Indeed, Japanese exports were a record JPY7.51trn in March (up 10.2% y-o-y), helped by a weak yen. This should cushion the economy.
Private consumption, which generates 55% of GDP, rose by 0.9% q-o-q in Q107, down from 1.1% in Q406, which was the fastest gain in three years. Overall, consumer expenditure has been holding up reasonably well. The main constraint is the relatively slow pace of wage growth, with corporate profits failing to trickle down to employees.
The Commercial Banking Sector At December 31 2006, the loan/deposit, loan/asset and loan/GDP ratios were 77.8%, 52.3% and 82.2%, respectively. Over the preceding year the loan/GDP ratio has been falling, while both the loan/deposit and loan/asset ratios have been rising. Of the 59 countries for which we have compiled information, Japan has the 41st highest loan/deposit ratio, the 35th highest loan/asset ratio and the 14th highest loan/GDP ratio.
As at December 31 2006, total assets, loans and deposits amounted to US$6,738.6bn, US$3,523.3bn and US$4,528.1bn, respectively. According to these measures Japan is home to one of the largest banking sectors in the world.
Collectively Japan's banks appear to hold bonds worth US$1,649.8bn. This reflects a drop of about 4.4% in bond holdings during 2006. The banks' bond holdings amount to around 24.5% of total assets, making Japan one of the largest investors in bonds, both in relative and absolute terms. In absolute terms, with US$1,649.8bn in bond holdings, Japan is behind only the eurozone and the US. BMI considers that in an international context, the banks are highly exposed to bonds.
The nature of Japan's commercial banking sector leads to some crucial issues. With the rise of interest rates, and the expectation of further rate rises, several challenges have become increasingly conspicuous.
One challenge of these results from the high number of bond holdings: banks have reduced their bond holdings in parity with the rise in interest rates, as it is presumed that bond prices will be depressed by further rate rises. Another challenge comes from the banks losing market share to competitors, including corporate and consumer credit companies.
In addition, the size of the Japanese banks creates a further significant challenge. Many are faced with the strategic dilemma of having more cash than they know what to do with. The chief problem is that their earnings are still very modest by European and US standards, thus their priority is to put their vast pools of low-cost deposits to more profitable use.
Press Reports Recent reports in the Japanese and international press have concentrated on the gradual emergence of the Japanese banking sector from a decade long period of slow growth and poor performance. The sector is showing signs of being close to fully recovered from the bad-loans crisis which lasted for a decade, until 2005, having paid back the bailouts the Japanese government was forced to extend to many financial institutions. Added to this is the expansion of financial services banks and financial institutions are offering as result of deregulation of the sector, begun in the 1990s. Increasing domestic demand from the small- to medium-sized business sector - which took longer to recover from the financial downturn than larger enterprises - and from the retiring baby-boom generation has led to increased demand for the services of financial institutions.
The increasing health of the Japanese economy and the more stable position of its financial institutions has led to an increased interest in investment in the sector from foreign financial institutions, which are seeking to capitalise on the improving Japanese economy after a decade or more of slow growth.
Contents
Executive Summary
Key Issues
Changes To The Commercial Banking Forecast
Japan Commercial Banking SWOT
Latest Developments - Q307
International Context
Lending Trends And External Accounts
Total Assets, Loans And Deposits
Year-On-Year Growth Rates
Per-Capita Deposits
Macroeconomic Trends And Developments
Economics: BMI Core Scenario
Politics: BMI Core Scenario
Economic Activity
Industry Forecast Scenario
Comment On Forecasts
Comment On Trends
Banks' Bond Portfolios
Competitive Landscape
Market Protagonists
“Japan Commercial Banking Report Q3 2007” is available from Report Buyer. For more information go to: http://www.reportbuyer.com/
Piribo Product ID: BMI00402
