MNI POLICY: BOJ Sees Banks Coping Well As Yield Control Eased

Japanese commercial banks will avoid taking big losses on government bond holdings as the Bank of Japan loosens its yield curve control framework by holding the securities to maturity as they rebalance their portfolios towards higher-yielding debt, BOJ analysis ahead of October’s Financial System Report shows.

The effect of rising yields since the BOJ raised the effective upper limit on the 10-year bond to 1% in July has been limited, with banks able to cope with a gradual change without needing to offload bonds in a hurry, the analysis shows, MNI understands.

The BOJ’s continuing determination to keep its overnight lending rate below zero also makes it unlikely that the yield curve could invert, which would have a potentially serious effect on banks’ portfolios.

BANKRUPTCIES RISING

For the moment, the officials calculate that commercial banks do not anticipate any such policy normalisation soon, though lenders do expect rates to continue to rise as the yield control framework is further relaxed. BOJ officials are paying close attention to financial system views of their policy and also of growth and inflation, given that these could feed upward pressure on market rates, with banks already increasing lending rates. (See MNI POLICY: Weak Yen Adds To Pressure For Yield Curve Move)

Some regional banks with sufficient capital have also increased loan-loss reserves and BOJ officials are monitoring the impact on weaker institutions of any further increase in bankruptcies, which are already up sharply from a year earlier on the back of persistent high costs and labor shortages, though remaining at low levels similar to those prior to the pandemic. The Financial System Report is likely to maintain the view that risk-capital ratios are widely dispersed.

Bank officials are also examining how Japan’s regional financial institutions whose securities holdings include U.S. mortgage-backed securities have been affected by that country’s sluggish property market.

They are also focused on Japanese banks' dollar-funding in the U.S. as their funding costs rise in the wake of U.S. Federal Reserve rate hikes, although they do not currently face serious funding problems. Japanese banks in the U.S. cannot receive deposits from retail customers and rely on corporate deposits, funding from financial markets, and must raise deposit rates to raise necessary funds.