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By Hiroshi Inoue
TOKYO (MNI) - The Bank of Japan is concerned regional banks will face
growing difficulties using the low cost of credit to dress up earnings, as a
slowing economy will soon weigh on corporate profits, increasing company
bankruptcy levels and impacting on banks reserves, MNI understands.
The BOJ's semi-annual Financial System Report due out April 17, a week
ahead of the next policy meting, is expected to emphasize the need for
struggling banks to prepare contingency measures for such an outcome, but it
will not prompt the central bank to mull unwinding its easy policy although
officials will continue to monitor accumulated side-effects.
--STABLE FINANCIAL SYSTEM
The next FSR will likely repeat that Japan's financial system is in no
current danger, with capital bases at regional banks operating domestically well
above the required 4%.
However, the BOJ sees it as appropriate for the Financial Services Agency,
Japan's banking watchdog, to raise the 4% level as it is lower than the 7 to 8%
that overseas regulators require their private banks operating domestically
But as banks struggle with low profits, they will be required to write off
unrealized losses of securities, which in turn will hit their capital bases,
which could quickly become a downward spiral, even threatening the existence of
Around half of Japan's 106 regional banks are struggling to meet running
costs, with their margins on lending rates low and falling, forcing them to run
down their loan-loss reserves built up as the economy recovered in recent years.
However, the downturn will increase the need for banks to rebuild their reserves
to address the problems ahead.
The April FSR is expected to show that the real estate loans/GDP ratio will
turn to "red" from the "green" seen on the BOJ's heat map, an indicator of
stress levels in the system, in the October FSR, but the central bank will not
be overly concerned, as it has expecting such a move and sees no bubble building
in the sector.
The previous FSR said "some financial indicator indexes are getting closer
to red, although still in the green zone" and "the real estate loans to GDP
ratio has reached a historical high, deviating from its trend."
Property lending-to-GDP at the end of 2018 was 14.18%, higher than the
long-term trend of 11.66%, according to estimates by a private think tank.
Overall, the FSR will likely repeat October's assessment, saying financial
markets haven't shown signs of overheating and the domestic financial system
has, on the whole, been stable.
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