MNI POLICY: BOJ Report: No Overheating; Warns On Bank Capital

     TOKYO (MNI) - The Bank of Japan's prolonged easy policy, including large

scale asset purchases, hasn't caused an overheating as observed during the

bubble period of the late 1980s, the central bank's biannual Financial System

Report released Monday said.

     However, the FSR warned that financial institutions' core profitability is

falling and regional banks' capital adequacy is falling.

     "In a stress event, downward pressure on the economy from the financial

system -- a decrease in financial institutions' risk taking -- would be more

likely to intensify than in the past," the FSR said.

     "Financial institutions that have actively engaged in risk taking, in areas

such as lending to middle-risk firms and the real estate sector, as well as

securities investment, could experience larger declines in their capital because

of credit costs and losses on securities," the report added.

     Speaking Friday, BOJ Governor Haruhiko Kuroda said financial conditions

remain very accommodative, but there are no signs of overheating asset prices

and economic activities.

     --NO CHANGE IN POLICY

     The FSR will not trigger the BOJ board into quickly considering an

adjustment to its powerful easy policy in order to mitigate any side-effects and

the board will maintain the view that benefits of easy policy are greater than

any costs.

     Other key points from the FSR:

     --The core capital ratios for domestic banks have gradually declined

recently as banks haven't increased profits equivalent to risks.

     --Some financial institutions' capital levels are lower than their held

amounts of integrated risk.

     --Financial institutions are resilient on the whole. However, comparing the

latest stress test result with previous ones, financial institutions' net income

and capital adequacy ratios have been gradually decreasing.

     --The real estate loans to GDP ratio has reached a historical high,

deviating from its trend.

--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: MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$]