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MNI POLICY: BOJ Wary Of U.S. Credit Risk To Regional Banks

(MNI) Tokyo
(MNI) Tokyo

Bank of Japan officials are examining the potential for a rise in defaults in the U.S. during a future bout of financial instability could undermine the resilience of regional banks, a scenario not included in the latest round of stress tests, MNI understands.

While the BOJ's recent Financial Stability Report found the country's financial system to be resilient, it noted that the quality of banks’ domestic and foreign loan portfolios remained high on the whole but some loans entail high credit risk.

Bank officials see the main risk coming from offshore, with their attention trained especially on U.S. economic and financial conditions over the next few months.


Tightening by the Federal Reserve and a slower U.S. economy will tend to sap asset prices and widen bond spreads, eroding corporate profits and increasing bankruptcies, with spillover effects on Japanese financial markets and businesses. The scenario was not included in the last round of stress tests.

The BOJ is less concerned by regional banks’ exposure to U.S. real estate firms, though the country’s mega banks hold large portfolios in the sector.

Bank officials also expect an increase in bankruptcies in Japan due to higher costs and labour shortages, but they acknowledge that measuring credit risk in the country is challenging, given the lack of recent examples of closures by businesses, which have been heavily supported by government and monetary policy. (see: MNI BRIEF: Banks Must Be Vigilant Against Tail Risks - BOJ),

MNI Tokyo Bureau | +81 90-2175-0040 |
MNI Tokyo Bureau | +81 90-2175-0040 |

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