MNI POLICY: BOJ FSR: Warns Of Credit Risks On Prolonged Virus

     Japan's financial system is still stable and functioning properly, but

warned a prolonged coronavirus could cause issues, the Bank of Japan's Financial

Stability Report showed.

     "Should the substantial deterioration in the real economy be prolonged,

full-fledged financial adjustments through such vulnerabilities could give rise

to a negative feedback loop between the real economy and the financial sector,"

the FRS warned.

     Japanese firms on the whole have maintained robust financial bases both in

terms of retained earnings and cash availability, it said. "Based on these

observations, the following three risks to Japan's financial stability warrant

close attention".

     "The first risk is that credit costs could increase due to an economic

downturn at home and abroad," the report added.

     "The second risk is that gains/losses on securities investment could

deteriorate due to substantial adjustments in financial markets. In recent

years, large financial institutions have been increasing their overseas credit

investment while regional financial institutions have been increasing their

holdings of investment trusts, which are subject to various risks," it

continued.

     "The third risk is that foreign currency funding might be destabilized due

to the tightening of foreign currency funding markets mainly for the U.S.

dollar," the FSR said.

     The FSA also warned of dollar -funding by Japanese banks: "Should their

(banks) foreign currency funding become unstable, this could lead to a

deterioration in their gains/losses on overseas business through, for example,

the unwinding of overseas positions," it said.

     The FSR also said, "The second and third risks mean that risks can

propagate more easily between overseas and Japan's financial systems."

     "Financial institutions in recent years have expanded stable funding

sources such as client-related deposits to fund increased overseas lending and

securities investment. However, they still depend on market funding to a

non-negligible extent.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: MMJBJ$,M$A$$$,M$J$$$]