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--Ex-BOJ Yamamoto: Board Must Acknowledge Hidden Risk
--Ex-BOJ Yamamoto: Should Review If 2% Price Target Still Appropriate
--Ex-BOJ Official: Regional Banks' Financial Situation Very Severe
By Hiroshi Inoue
The Bank of Japan's easy policy is creating distortions that will
destabilize the financial system and concern as to whether the bank should
continue with its current policy framework is growing, a former senior BOJ
official told MNI.
The BOJ must review its 2% inflation target, as under the current operating
procedures they must continue with a policy that is creating a build-up of
risks, according to Kenzo Yamamoto, a former executive director in charge of
"As long as the BOJ aims to achieve the 2% price target, it will not be
able to adjust the policy. Prolonged easy policy is increasing the various
risks, which will destabilize the financial system," Yamamoto told MNI.
Many BOJ board members have downplayed risks of both a gradual pullback in
financial intermediation and a systemic destabilization, reading the "heat map"
in the latest Financial System Report as showing no signs of either overheating
or contraction in the current phase of the cycle, the former staffer said.
Yamamoto said the meaning of the heat map has changed, however, and board
members shouldn't risk a policy misstep over a misreading. The heat map is used
to measure the temperature of the economy after financial institutions rack up
losses following an asset bubble collapse, but that doesn't reflect the present
situation, Yamamoto added.
"Although Japan isn't in a bubble, business conditions at financial
institutions are worsening," he said.
--MARGINS TO FALL
Yamamoto is also concerned that the BOJ's prolonged easy policy is
loosening fiscal discipline, destabilizing the financial system and damaging
"The easy policy is strongly weighing on banks' profits. The margin from
loans are falling below 0.1% (in fiscal 2017), which is one-fifth of those seen
in fiscal 2005, and will likely be close to zero percent," he said, adding, "If
credit costs rise under existing conditions, margins would disappear,"
increasing risk in the system.
"Credit costs will not surge immediately. But banks' margins are falling
and credit costs will gradually rise if the economy slows. Banks are dressing up
their earnings through realized profits. The worst case is rising interest rates
and falling stock prices, which will increase unrealized losses," Yamamoto said.
He added that those unrealized losses will not affect the capital base of
domestically focussed regional banks, although their institutional investors are
monitoring the situation closely. This will drive troubled or weak banks to
tighten their lending books, triggering systemic risk.
Yamamoto said that the BOJ lowering short-term interest rates from -0.1%
will not be a great help, as commercial banks will gain no benefit unless they
lower the deposit rate they offer customers into negative territory.
"Unless the BOJ and the Financial Services Agency promote lowering deposits
rates below zero percent, commercial banks will not lower theirs," he said,
adding that it is highly likely that the government or lawmakers are opposed to
such a move.
Yamamoto noted that BOJ loans to commercial banks at negative interest
rates is an option, but would be difficult to introduce as they will be
interpreted as subsidies to banks.
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