MNI POLICY:Japan Authorities Must Watch For Asset Bubble Burst

By Hiroshi Inoue

     TOKYO (MNI) - Japan's policymakers must prepare contingency plans for the

increased risk of a bursting of the asset bubble in 2020 which could lead to a

worsening of the financial system.

     Pinpointing when and how asset bubbles burst is difficult, but the

International Monetary Fund has warned that the vulnerability at non-banks and

firms is higher than that of the Lehman Shock.

     The U.S. Federal Reserve also warned that corporate debts have increased

sharply, with credit risks are being underestimated.

     Prolonged accommodative monetary policy by major central banks has helped

the build-up of imbalances, encouraging financial institutions to buy stocks and

invest money in real estates.

     --STIMULUS

     Government stimulus measures, alongside measures to mitigate against the

impact of the sales tax hike, have all been enacted to help insure against a

slower global economy, but have all added to boosting liquidity as well, a

person who is familiar with the thinking said.

     Hirohide Yamaguchi, a former Bank of Japan Deputy Governor and now the

chairman of the advisory board at Nikko Research Center, recently warned that

the "Asset bubble, probably in the U.S., would burst" in the not too distant

future.

     "It is good for asset prices to rise. The problem is that banks lend money

to entities who have no ability to repay money but purchase assets. If prices

fell, lending would turn to non-performing loans at financial institutions, he

added.

     Hiromi Yamaoka, a former BOJ official and now the head of Future Institute

for Economic Research and Financial Strategy, warned that monetary authorities

should be focused on the risk of an economic crisis. History has shown that

economic crises have happened when excessive risk-taking was justified, policy

action delayed and markets' expectations dissipated.

     Both risk-taking and a delay of policy action was attended by the increase

of debts, Yamaoka said.

     --INJECTIONS

     If Japan's financial system is destabilized via an overseas shock, the BOJ

has no option of injecting liquidity into financial markets to stabilize

markets.

     Financial markets have been heartened by a partial trade deal between the

U.S. and China and stock prices have risen around the globe as the deal is

regarded as a step toward resolving a tit-for-tat tariff battle that has dragged

on for well over a year.

     However, it remains uncertain how and when trade will pick up and the

global economy regains momentum.

     Looking ahead, if Japan's exports don't recover as much as expected based

on the trade deal, it would hit business sentiment, lower stock prices, in turn

increasing downward pressure on asset prices - and that would increase

non-performing loans at financial institutions, especially regional banks.

     In Japan, many financial institutions have been investing money in overseas

financial assets, including middle-risk assets, to seek higher return, but they

haven't sufficiently increased loan reserves.

     A sharp increase in non-performing loans would destabilize the financial

system, forcing the BOJ to inject ample liquidity and the BOJ and the Financial

Services Agency repeatedly warned of financial institutions' excessive

risk-taking activities.

     The BOJ's latest Financial System Report said, "The rate of increase in

underwriting of loans to lower-rated and non-investment-grade firms by Japanese

banks has been substantially higher than that by U.S. and European financial

institutions."

     The amount collateralized loan obligations (CLOs)) arranged in 2018 hit a

new record, reflecting increased investor demand due to concern over U.S. policy

rate hikes. CLO investments of Japanese banks currently account for about 20% of

their overall investments in overseas credit products.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

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