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Free AccessMNI INSIGHT: BOJ Eyes Macro Policy To Address Fnc'l Imbalances
--
By Hiroshi Inoue
TOKYO (MNI) - Raising interest rates will not help mitigate the
side-effects of prolonged easy policy and the Bank of Japan believes both they
and the Financial Services Agency need to address financial imbalances through
both macro- and micro-prudential policies, MNI understands.
The BOJ is ready to encourage troubled financial institutions to take
concrete actions wherever it sees problems arising, by highlighting the outcomes
of the latest stress tests.
The BOJ's stance of dealing with banks' excessive risk-taking and with
falling capital bases at regional banks through both macro- and micro-prudential
policy is based on work in the latest Financial System Report, released on Oct.
22.
--FIRST REFERENCE
"Based on the results of the macro stress testing for individual financial
institutions outlined in this Report, among other information, the BOJ intends
to increase its dialogue with financial institutions in order to promote a
deeper common understanding with regard to resilience to stress," the FSR said.
It is the first time that the FSR has referred to the BOJ's stance
encouraging regional banks to boost their fragile financial conditions caused by
excessive risk-taking.
"Margins from loans are falling amid prolonged low interest rates. Credit
costs are falling as the number of bankruptcy continues falling. Banks are
compensating low profits through capital gains, but they cannot do so forever,"
BOJ Governor Haruhiko Kuroda said last week.
He added that the BOJ will make efforts to grasp the full details of the
current situation through both on-site examinations and off-site monitoring of
financial institutions, encouraging them to take concrete actions as necessary.
--CANNOT RAISE LOAN RATES
In a survey conducted by the BOJ, around half of regional financial
institutions responded that loan interest rates for mid-risk firms do not
adequately match credit costs.
About 90% of regional banks said the severity of the competitive
environment makes it difficult to raise loan interest rates for mid-risk firms,
even if market interest rates rise, the FSR said.
If the BOJ raised interest rates, it would have no effect in boosting loan
margins and in encouraging banks to improve their risk-taking, the central bank
believes.
About 40% of smaller firms have no financial debt, meaning that their
financial assets exceed their debt. The remaining 60% firms are increasing their
borrowing from banks, according to data compiled by the BOJ.
--HIGH LEVERAGE
The latest data showed that loans by regional banks rose 3.3% on year in
October following a 3.4% rise in September and a 3.5% in August, highlighting
that many firms are leveraging debt sharply.
Raising interest rates is one option open to the BOJ to help cope with
financial imbalances, but raising rates now is seen as difficult due to the
continuing downside risks for Japan's economy.
Under existing conditions, if the economy worsened, banks will suffer from
nonperforming loans and higher credit costs, which in turn will lower banks'
profits, with the concern it will eventually destabilize the nation's financial
system.
The BOJ must maintain financial system stability, as any worsening will
prevent favorable effects from easy policy filtering through to the real
economy, BOJ officials believe.
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com
[TOPICS: MMJBJI,MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.