MNI POLICY: BOJ Sees No Overheating; Warns On Capital Adequacy

     TOKYO (MNI) - Despite rapid growth in real estate loans, the Bank of Japan

still sees financial and economic activities as a whole showing no signs of

overheating such as seen through the late 80's 'bubble', the BOJ's biannual

Financial System Report released Wednesday said.

     However, the report said "possible vulnerabilities of the real estate

market warrant close attention."

     The latest FSR again pointed to the accumulated risks caused by  prolonged

easy policy, but the comments will not prompt the BOJ board to unwind it anytime

soon.

     The report also said regional financial institutions have generally not

been able to secure profits commensurate with the increase in risk-weighted

assets, while their capital adequacy ratios and stress resilience have declined

moderately."

     "Should this situation persist, downward pressure on the real economy from

the financial system could intensify in the event of stress, as the capital of

financial institutions would decrease substantially due to increased credit

costs and securities-related losses," the report warned.

     --DOMESTIC PROFITS

     The report also said that the profitability of domestic deposit-taking and

lending activities has continued to decline, mostly caused by structural factors

such as lowered growth expectations and the secular decline in loan demand, as

well as the prolonged low interest rate environment."

     --HEAT MAP

     As MNI forecast earlier this month, the FSR's heat map shows that the real

estate loans to GDP ratio turned "red," signalling an overheating for the first

time since the end of 1990.

     The BOJ doesn't see the red indicator as meaning there is a bubble in the

sector and, having expected such a move, the bank will not take it too

seriously.

     --DOWNSIDE TAIL RISK

     The latest report also said, "The recent expansion in the financial cycle

has contributed to an increase in the downside tail risk from a somewhat

longer-term perspective by building up pressure on balance sheet adjustments on

the back of the cumulative effects of low interest rates."

     It also said, "Some signs of changes are observed: credit costs appear to

have begun increasing, albeit they are still at low levels, and investment in

securities has also seen losses in foreign bonds and a decrease in room for

realizing gains on securities."

--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$$$,M$J$$$,MI$$$$]