MNI INSIGHT: BOJ Concern Grows Over Megabank Investment Losses

The Bank of Japan is increasingly concerned that the nation’s so-called megabanks could face big losses on their overseas financial investments as the U.S. faces both higher rates and a likely recession, possibly crimping lending in Japan and adding to downward pressure on the economy, MNI understands.

In its next Financial System Report in October, the BOJ will say that such risks have risen since April, and that while the Japanese financial system would remain robust even in the face of a severe market downturn, potential overseas losses by the three biggest banks could prompt a more cautious attitude to lending at home.

Dealing with ultra-low interest rates in Japan, Mitsubishi UFJ Financial Group Inc, Mizuho Financial Group Inc and Sumitomo Mitsui Financial Group Inc have increasingly sought business abroad, including investing in overseas securities as well as in bonds and loan syndication.

With U.S. rates now rising, the megabanks’ appraised losses on foreign bonds widened to JPY2.5 trillion at the end of June from JPY1.7 trillion at the end of March, Nikkei reported.

EASY STANCE

The BOJ is also monitoring the possible extent of losses by Japanese regional banks on overseas investment trusts.

Weakness in the U.S. and global economies would reduce the chance that the BOJ will adjust its easy monetary policy stance under the new governor who will replace Haruhiko Kuroda from April 2023. (See MNI INSIGHT: BOJ Eyes Autumn Move If Yen Steadies, Prices Rise)

The BOJ may also find itself obliged to provide dollar funds to Japanese banks’ overseas operations if they struggle to match higher deposit rates paid by U.S. commercial banks and face withdrawals.

BOJ officials are also monitoring the effect on Japanese corporate finances from higher commodity prices and the impact of Covid restrictions, though companies have high cash buffers.