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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
     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.
     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.
     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
     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%
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email:

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