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Free AccessMNI POLICY: BOJ FSR Warns On Impact of Prolonged Econ Slowdown
--FSR Cites Three Main Risks that the BOJ must pay attention
Japan's financial system is likely to remain highly robust, even under the scenario of a moderate economic recovery, the Bank of Japan's latest Financial System Report said.
However, the FSR, published Thursday warned that the spread of Covid-19 and their "impact on the domestic and overseas economies are subject to considerable uncertainty" and that could lead to significant adjustments in financial markets and a "deterioration in financial firms' financial soundness".
That, the report added, could lead to an "impairment of the smooth functioning of financial intermediation could pose a risk of future downward pressure on the real economy".
But overall, Japan's financial system has been maintaining stability on the whole, while Covid-19 continues to have a significant impact on economic activity at home and abroad," the FSR said.
RISKS
The FSA cited three risks that the BOJ must watch across the financial system; an increase in credit costs at home and abroad, a deterioration in gains/losses on securities investment due to substantial adjustments in financial markets; destabilization of foreign currency funding due to the tightening of foreign currency funding markets mainly for the U.S. dollar.
"From a macroprudential perspective, it is important to prepare for these risks and do the utmost to ensure the stability of the financial system and the smooth functioning of financial intermediation," the report noted.
HEAT MAP
As for the heat map in the FSR, all six financial activity indexes are "red", meaning they have shown a large upward deviation from the trend; the private investment to GDP ratio, the growth rate of M2, the household loans to GDP ratio, and the corporate credit to GDP ratio.
Despite the six red indexes, the FSR said the current situation is the result of "financial institutions' response to meet the demand for working capital that has increased at an exceptional speed and to an exceptional extend due to the impact of Covid-19. Under these circumstances, it is not appropriate to interpret the red indexes as a sign of overheating of financial activities."
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