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Banking - Interest rates - Essay Example
Finance & Accounting
Pages 3 (753 words)
Benefits and costs of low Japanese interest rates for the banking industry Interest rate is one of the major factors affecting economies productivity. It also has direct effects on inflation rates and is one of the monetary policies that governments use to ensure stability of their economies…
One of the effects of the low interest rate on the Japanese banking sector is reduced productivity. Banks have been forced to operate under low revenue level and net interest margins explain this. Interests that banks charge on their customers on loans forms a significant percentage of their income, while interest that banks pay on their customers’ deposits contribute to the banks’ expenditure. Maximizing revenues would therefore require optimizing the gap between interest charged on loans and interest paid on deposit. The country’s low interest rate however offers a restricted interest rate margin by putting an upper limit on what the banks can charge. At the same time, competition in the industry dictates minimum limits that banks can offer on deposits and the two factors means high expenditures on interest on deposits and limited revenues from interest on loans to customers. This has reduced profitability from lending and has forced some banks in Japan to seek alternative sources of revenues, apart from domestic lending (Weistroffer 2). Reports by the International Monetary Fund support the position that low interest rates have reduced profitability in the Japanese banking sector. According to the organization, the net interest margin has been declining and this has forced Japanese banks to venture into foreign markets. ...
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