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MNI POLICY: BOJ To Be Pre-Emptive If Intermediation Stalls

TOKYO (MNI)

The Bank of Japan board will consider pre-emptive policy adjustments to prevent any further deterioration in financial intermediation as a result of its easy stance as such a development could delay achieving the 2% price target, MNI understands.

Policymakers will examine real-time reports from the Financial System and Bank Examination Department on a quarterly basis as against semi-annually now to determine whether prolonged downward pressure on banks' profits could lead to a gradual pullback in financial intermediation.

Banks' profits are in a declining trend due to prolonged low interest rates and structural factors such as the shrinking population, the squeeze on banks' profitability and a weakening in their soundness, the BOJ warns.

If the board is of the view that banks' financial intermediation is set to be stagnant or that the effects of easy policy are set to weaken, the bank will consider the need to adjust its settings although any move will require a careful examination of developments.

Smooth financial intermediation is essential for the BOJ to increase the effects of easy policy but the cumulative unfavourable effects of such a policy have increased the need for vigilance. One risk is that the financial system's vulnerability could increase, mainly due to the financial institutions' quest for higher yield.

The board has requested staff of the Financial System and Bank Examination Department to attend the quarterly meeting following its Outlook Report, and explain developments in the financial system.

The Department now issues the Financial System Report semi-annually, including the near-term assessment of the financial system and future risks, based on several simulations.

MNI Singapore Bureau | +65 9 632 1991 | sumathi.vaidyanathan.ext@marketnews.com
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MNI Singapore Bureau | +65 9 632 1991 | sumathi.vaidyanathan.ext@marketnews.com
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