MNI BRIEF: Risk Of Higher Yen Interest Rates On BOJ Radar

The Bank of Japan may likely emphasise the need for Japanese financial institutions to manage higher yen interest-rate risk on portfolios when it publishes the Financial System Report Friday, as the chance of policy tweaks increases under the new Governor Kazuo Ueda, MNI Understands.

The previous FSR released in October warned of the impact of higher U.S. interest rates and the inverted yield curve on foreign bonds held by Japanese financial institutions, which have suffered unrealised losses on foreign bonds following the rise in U.S. interest rates (See: MNI BRIEF: BOJ Eyes Banks' Dollar Funding Costs As Rates Rise). However, the BOJ determined the losses did not undermine the stability of the nation’s financial system as commercial banks had sufficient capital and liquidity. The risk facing commercial banks has now shifted to the outlook for yen interest rates.

But the accumulated impact of high U.S. interest rates will increase the financial burden on businesses and could tighten bank lending, which will worsen economic activity, the BOJ warns. The Bank will watch the U.S. economy closely before making any tweaks to its policy settings, MNI reported recently (See: MNI POLICY: US Recession Could Close BOJ Tweak Window).