How will negative interest rates affect Japanese banks?

Moody's estimates a 4%-7% decline in aggregate net income.

Janese banks' profitability will deteriorate marginally following the introduction of a negative interest rate policy (NIRP), said Moody's.

Based on a bottom-up analysis, which focuses on the loan assets directly exposed to lower rates, the rating agency estimate that the system would see a 4%-7% decline in net income from the level reported in the fiscal year ended March 2016 (FYE3/2016), with the regional banks more affected than the major banks.

"Our top-down analysis, based on a statistical analysis of the relationship between bank profitability and the prevailing sovereign interest rate curve, broadly confirms the results of our bottom-up analysis," it said.

Moody's added that its scenario analysis estimates a decline in the net interest margins (NIMs) of between zero and 3 basis points (bps) at the major banks, and one between 3 to 9 bps at the regional banks.

It further estimates that a 3bps decline in NIMs would equate to 8% of the regional banks' net income for FYE3/2016, a result largely in line with our bottomup analysis.