REPEAT: BOJ Fin'l Report: No Overheating; Bank Profits Too Low

Repeats Story Initially Transmitted at 06:41 GMT Oct 23/02:41 EST Oct 23

     TOKYO (MNI) - More than four years of aggressive easing by the Bank of

Japan has not caused any overheating in the economy or financial system but the

profitability of lenders remains low because there are too many of them, the

central bank said in its biannual Financial System Report released Monday.

     "No imbalances in financial and economic activities can be observed on the

whole while the funding conditions for the nonfinancial private sector have been

highly accommodative," the central bank said.

     "The real estate market does not seem overheated on the whole, although

transaction prices remain high in some places such as the Tokyo area."

     The assessment was largely unchanged from the BOJ's previous report issued

in April.

     "Signs of overheating in a large part of financial and economic activities

have not been observed on the whole, although the funding environment for the

nonfinancial private sector has been highly accommodative," the bank said six

months ago.

     "Nevertheless, amid the continued low interest rate environment, banks have

adopted the most accommodative lending stance since the bubble period [of the

late 1980s]. With regard to the real estate market, it is necessary to carefully

examine whether there will be an excessive decline in risk premiums, etc.," it

also warned in April.

     In the latest report, the BOJ analyzed the potential vulnerabilities due to

the decline in financial institutions' profitability.

     "The low profitability of Japanese financial institutions is striking from

an international perspective. The number of financial institutions'

employees/branches may be in excess relative to demand," it warned. "This

structural factor in turn leads to a decline in financial institutions'

profitability through the intensified competition among financial institutions

in Japan."

     The decline in population and the number of firms is a common shock

occurring throughout Japan, the BOJ noted.

     "In this situation, the intensification of competition among regional

financial institutions would affect systemic risk by increasing the effects of

common exposure, that is, by decreasing net interest income," it said.

     The BOJ called for examining both the risk of overheating -- excessive

accumulation of macro risks and exuberant asset prices, reflecting financial

institutions' shifts toward excessive risk taking to maintain profitability --

and the risk of a gradual pullback in financial intermediation due to a

persistent decline in profits.

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

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com