The stock index Nikkei 225 he went down over 12% on August 5 and recovered 10% the next day. On August 7, the yen weakened by more than 2% after the Bank of Japan said it would not raise rates as long as markets were unstable, following an earlier yen surge and an impact on carry trades. He writes Morningstar DBRS in a report on three Japanese mega-banks (MUFG Bank; Sumitomo Mitsui Banking Corporation; Mizuho Bank), arguing that the earnings generation capacity and capital buffers mitigate the negative impact of extreme volatility.
Japanese Banks, Morningstar DBRS Analysis
According to the rating agency, the environment of interest rates higher has been positive for the three Japanese mega-banks’ earnings and he expects that to continue. Meanwhile, market volatility is generally favorable for trading income.
It is noted that the Japanese mega-banks hold significant cross-holdings via Japanese equities in addition to their holdings in Japanese government bonds; however, they have actively liquidated these bond holdings in recent years.
THE capital buffer above the regulatory minimum were ample at the end of F23 and banks’ CET1 ratios will likely continue to benefit from banks’ improved ability to generate profits, which provides room to absorb shocks.
“The profitability of Japanese mega-banks is in upward trend largely thanks to a higher interest rate environment, in contrast to a long period of ultra-low rates, and this should continue,” he said.
Senior Vice President of Morningstar DBRS – Furthermore, if the recent significant volatility in Japanese equities were to continue, we believe it is unlikely to have a material impact on banks’ capital strategy at this point.”
