Insights into the Low Profitability of Japanese Banks: Some Lessons from the Analysis of Trends in Banks' Margins

Developments in overall margins of Japanese banks have shown no major change during the last twenty years: a slight contraction in the early 1980s, followed by a discrete expansion during the bubble period, have only served to highlight their extreme stability. Meanwhile, net overall margins after considering loan-losses have been negative since fiscal 1993 as overall margins failed to respond to soaring loan-losses. By dividing overall margins into the lending spread and the fund-raising spread, we find that the fund-raising spread contracted considerably from the 1980s to the 1990s while the lending spread expanded considerably during the same period. The change in fund-raising spread is attributable to two factors: a decline in so-called "rent" owing to deregulation of deposit interest rates since the middle of the 1980s and a fall in market interest rates to close to zero. Meanwhile, the change in lending spread is partly attributable to a rising consciousness of credit risk among banks since the early 1990s. The expansion of lending spread, however, has only offset the contraction of fund-raising spread and stopped short of covering loan losses, suggesting that banks regarded soaring credit costs since the early 1990s as temporary losses to be covered by capital, not as current losses to be covered by overall margins.