MNI INSIGHT: BOJ Seeking New Indicator of Accumulated Risks

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials are trying to come up with a new

indicator to show the accumulated costs of prolonged large-scale monetary

easing, MNI understands.

     The officials don't expect the board to reduce the scale of easing anytime

soon but they wish to alert some board members who may be complacent about the

costs.

     The BOJ is likely to mention the risk of prolonged easing in the next

twice-annual Financial System Report to be released in mid-October, before the

key policy meeting on Oct. 30-31, when the board updates its economic

projections and risk analysis in the quarterly Outlook Report after July.

     --NEED FOR FINE-TUNING

     The next FSR may prompt the board to consider a fine-tuning of the

aggressive easy policy in place since April 2013 and modified in September 2016.

     To the chagrin of the bank's Financial System and Bank Examination

Department, the report it released in April gave a sense of relief to those

board members who believe the BOJ should push for large-scale easing to hit the

2% inflation target.

     The report warned that "the current sufficiency of banks' level of capital

doesn't necessarily guarantee the future stability of the financial system,"

while concluding that aggressive easing had not caused any overheating in the

economy or financial system.

     The FSR has been pointing to several risks of the easy policy but more than

half of the nine board members who are mainly focused on the 2% price target

hasn't taken them seriously, officials who compile the report believe.

     Some BOJ board members have openly endorsed the warnings issued by private

analysts and market participants over the accumulating costs of the aggressive

easy policy, such as squeezing profits for lenders.

     --HEAT MAP WARNINGS

     However, even those board members have judged that the financial imbalances

and side-effects of the easy policy haven't accumulated very much, based on the

"heat map" in the FSR.

     The heat map shows, using colors, the deviation of various Financial

Activity Indexes from their trends to objectively assess whether there are any

signs of overheating or contraction in the current phase of the financial cycle.

     The latest heat map showed no overheated activity in financial markets. All

the 14 signals were green in the April report while there was a red signal on

the scale of loans to real estate compared to nominal GDP in the April 2017

report.

     --ANOTHER RISK INDICATOR

     In addition to the heat map, BOJ officials see the need for another

indicator that would show the accumulating unfavorable effects of the easy

policy and prompt board members to take the risk more seriously.

     The FSR includes analysis of the financial system conditions and the impact

of the easy policy on broad entities, including risks facing financial

institutions, but it hasn't shown how unfavorable effects of easy policy have

accumulated over time.

     Some board members are worried about the risk that invisible financial

imbalances accumulate in the absence of overheating growth or inflation, which

could destabilize the financial system.

     It may be too late for the BOJ to take action after those imbalances have

become visible but at the same time it is difficult for the bank to justify

conducting a preemptive tightening while it has not anchored stable 2%

inflation.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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