TOKYO, Nov 1: Japanese banks with large government bond holdings will be in serious danger if the country’s ultra-low interest rates rise, a credit agency warned on Thursday, but analysts argue lenders have more pressing concerns.

If interest rates rise, the value of the banks’ fixed income portfolios will decline and the banks’ capital bases will be eroded, global risk evaluator Standard and Poor’s (S and P) said in a statement.

The ratings agency noted with alarm that banks have become overly reliant on Japanese government bonds as investments, and a slight change in interest rates could cripple their balance sheets.

The asset structure of Japanese banks has changed substantially in recent years with the proportion of securities holdings, particularly fixed-rate government bonds, growing to historically high levels, the agency said.

The ratio of the banks’ Japanese government bond assets to total assets rose to 9.8 per cent this June from between two-and-three per cent in the 1990s.

A mere one per cent gain in interest rates would cause the holdings of the major banks to decrease in value by about $12.3 billion and spark a bond market crash, S and P speculated.

Naoto Odagiri, banking sector analyst at BNP Paribas, said the agency was right to worry about an interest rate hike, but argued the return on loans held by banks would also rise.

It is a very popular argument but it is only one side of the situation banks can benefit from a rise in interest rates, he said.

Japan’s 136 banks held 71 trillion yen in bond assets as of March this year, compared with 475 trillion yen in loans, said Odagiri.

A mountain of non performing loans coupled with banks’ massive shareholdings — which have plummeted in value in line with a stock market slump — are far more worrying issues, analysts said.—AFP