TOKYO: Japanese regional banks will see core operating profits fall by 21 percent if the central bank deepens negative interest rates, S&P Global Ratings said on Tuesday, warning of the potential dangers of ramping up an already massive stimulus program.

A 0.1 percent point cut in the BOJ’s short-term policy target will also reduce core operating profits of major commercial banks by 6 percent, the rating agency said in a report.

“Much bigger headaches loom for Japan’s already struggling banks if the country’s central bank pushes interest rates down further. And regional banks will be worst hit,” it said.

The warning comes ahead of the BOJ’s closely-watched rate review ending on Thursday, when it is seen holding policy steady but stressing its readiness to top up stimulus if overseas risks threaten a fragile economic recovery.

Regional banks are particularly vulnerable to the hit from deeper negative rates as their profits rely more heavily on domestic lending than their bigger peers, S&P said.

Based on data for the fiscal year ended in March, 10 out of 64 regional banks lost money in their lending businesses, the report said.

A further deepening of negative rates would bring that number up to 56 regional banks, or 88 percent of the total, it said.

Under a policy dubbed yield curve control (YCC), the BOJ guides short-term rates at -0.1 percent and the 10-year government bond yield around 0 percent to help it achieve its 2 percent inflation goal. That target has so far proved elusive, which has fueled speculation the BOJ must either step up stimulus or lower its goal.

BOJ Governor Haruhiko Kuroda has signaled that deepening negative rates will be among key options if the BOJ were to ease. But critics have warned that doing so could do more harm than good by hurting commercial banks’ profits and discouraging them from boosting lending.

The central bank itself is mindful of the rising cost of prolonged easing. In a report issued last week, the BOJ said commercial banks are loading up on complex financial products and risky loans in their hunt for yields.

S&P based its estimates on the assumption that a 0.1 percent point cut in the BOJ’s short-term rate target will lead to the same margin of fall in banks’ lending rates.

The rating agency said the BOJ’s introduction of negative rates in 2016 has so far pushed down the average interest rate on Japanese banks’ outstanding loans by 0.22 percent point.

Reuters