MNI POLICY: BOJ Sees Stable Financial System, Wary Of Risks

Bank of Japan officials view the turmoil in the U.S. and European banking systems as unlikely to undermine the stability of Japan's financial system, though they are alert to global growth risks and will provide an update in April's Financial System Report, MNI understands.

The BOJ's coordination with major central banks to offer U.S. dollar liquidity is a pre-emptive move to stabilise global markets rather than an indication of any U.S. dollar liquidity issues, with officials monitoring potential economic consequences and the impact on smaller, more capital-constrained regional institutions should growth turn down sharply. (See MNI: Central Banks Announce Enhanced Liquidity Provision)

The uncertainty triggered by the collapse of Silicon Valley Bank and rushed sale of Credit Suisse looms as an early test for incoming governor Kazuo Ueda and his ability to modify the BOJ's yield curve control policies. While the fall in yields have alleviated some concerns about unrealised bond losses, the prospect of slower global growth weighing on Japan's production and exports underscores the need to maintain easy policy and a gradual approach to changing yield curve control. (MNI POLICY: BOJ's Ueda To Wait And Watch As 10-Yr Yield Sinks)

BOJ research has assessed the financial system to be reasonably positioned in the event of renewed financial stress. October's Financial System Report contained a stress test scenario - based on a negative shock similar to the Global Financial Crisis - that showed capital adequacy ratios at the end of fiscal-2024 would remain above regulatory levels on average for all types of banks.

However, the emergence of any liquidity problems would increase pressure on the BOJ to increase its fund-providing operations to ensure lenders have ample access to liquidity. The Topix Banks Index of bank shares is down 16% from its March 9 high.

U.S. GROWTH

Slower or smaller rate hikes by the Federal Reserve following the Silicon Valley Bank collapse could lead to faster and bigger rate hikes afterward to tame inflation, possibly triggering a bigger-than-expected U.S. economic downturn, the BOJ has warned.

A serious U.S. economic downturn would dampen Japan’s exports and production, which have been more or less flat and have slowed from their rising trend.

Government data showed overseas machinery orders fell 25.2% m/m in January, reversing a 10.5% rise in December, showing slowing overseas demand is affecting capital investment.

BOJ officials are focused on whether capital investment plans in fiscal 2023 remain solid in the BOJ March Tankan business sentiment survey due out on April 3. However, capex plans in the March Tankan aren’t reliable as businesses refrain from revealing capex plans before the beginning of the new fiscal year, making revised capex plans in the June Tankan more reliable and closely watched by bank officials.