Banks During the Pandemic: A Japanese Perspective

Abstract

In recent years, Japanese banks have revived their leading international role in the provision of global liquidity. Since the start of the pandemic of COVID-19, Japanese banks have increased their overseas lending at a much higher pace. This article looks at the activities of Japanese banks, and the drivers behind such a surge by considering factors that characterize the domestic economy. It is argued that uncertainties associated with COVID-19, and government response by means of introducing numerous unconventional measures to counter adverse effects of the pandemic, have increased cash hoarding in the economy. Japanese banks have seen a surge in the deposits held, as well as a decline in loans. Data from the Senior Loan Officer Opinion Survey on Bank Lending Practices at Large Japanese Banks reveals that the demand for loans from all size firms and households has declined since mid-2020. Faced with ongoing razor-thin margins and prolonged low interest rates at home, Japanese banks have continued their overseas activities in a search for yield; and they have increased their exposure to offshore financial centers which could have potential domestic financial stability implications.

Keywords:

• offshore cross-border claims
• Japanese banks
• COVID-19 pandemic

JEL Classification Codes:

• E02
• E41
• E51
• F34

Notes

1 In an attempt to achieve the 2% inflation rate target in 2016 the Bank of Japan introduced the “quantitative and qualitative monetary easing (QQE) with negative interest rate.” The increase in money supply through purchasing long-term Japanese movement bonds policy resulted in the flattening of the yields curve. In response to this, Japanese banks reduced their holding of government bonds (Yoshino, Taghizadeh-Hesary, and Miyamoto 2017).

2 Even though foreign subsidiaries are separate legal entities, parent banks are positively related to the risk exposure of their foreign affiliates and hence they can bear the risk of their own subsidiaries (see Anginer, Cerui, and Peria 2017)

3 Basel III supplementary leverage ratio measure requires large banks to fund themselves with equity worth at least 5% of their total assets.

Additional information

Notes on contributors

Mimoza Shabani

Mimoza Shabani is at the Royal Docks School of Business and Law, University of East London.