REPEAT: MNI: BOJ Eyes Macro Policy To Address Fnc'l Imbalances

Repeats Story Initially Transmitted at 07:53 GMT Nov 12/02:53 EST Nov 12

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By Hiroshi Inoue

     TOKYO (MNI) - Raising interest rates will not help mitigate the

side-effects of prolonged easy policy and the Bank of Japan believes both they

and the Financial Services Agency need to address financial imbalances through

both macro- and micro-prudential policies, MNI understands.

     The BOJ is ready to encourage troubled financial institutions to take

concrete actions wherever it sees problems arising, by highlighting the outcomes

of the latest stress tests.

     The BOJ's stance of dealing with banks' excessive risk-taking and with

falling capital bases at regional banks through both macro- and micro-prudential

policy is based on work in the latest Financial System Report, released on Oct.

22.

     --FIRST REFERENCE

     "Based on the results of the macro stress testing for individual financial

institutions outlined in this Report, among other information, the BOJ intends

to increase its dialogue with financial institutions in order to promote a

deeper common understanding with regard to resilience to stress," the FSR said.

     It is the first time that the FSR has referred to the BOJ's stance

encouraging regional banks to boost their fragile financial conditions caused by

excessive risk-taking.

     "Margins from loans are falling amid prolonged low interest rates. Credit

costs are falling as the number of bankruptcy continues falling. Banks are

compensating low profits through capital gains, but they cannot do so forever,"

BOJ Governor Haruhiko Kuroda said last week.

     He added that the BOJ will make efforts to grasp the full details of the

current situation through both on-site examinations and off-site monitoring of

financial institutions, encouraging them to take concrete actions as necessary.

     --CANNOT RAISE LOAN RATES

     In a survey conducted by the BOJ, around half of regional financial

institutions responded that loan interest rates for mid-risk firms do not

adequately match credit costs.

     About 90% of regional banks said the severity of the competitive

environment makes it difficult to raise loan interest rates for mid-risk firms,

even if market interest rates rise, the FSR said.

     If the BOJ raised interest rates, it would have no effect in boosting loan

margins and in encouraging banks to improve their risk-taking, the central bank

believes.

     About 40% of smaller firms have no financial debt, meaning that their

financial assets exceed their debt. The remaining 60% firms are increasing their

borrowing from banks, according to data compiled by the BOJ.

     --HIGH LEVERAGE

     The latest data showed that loans by regional banks rose 3.3% on year in

October following a 3.4% rise in September and a 3.5% in August, highlighting

that many firms are leveraging debt sharply.

     Raising interest rates is one option open to the BOJ to help cope with

financial imbalances, but raising rates now is seen as difficult due to the

continuing downside risks for Japan's economy.

     Under existing conditions, if the economy worsened, banks will suffer from

nonperforming loans and higher credit costs, which in turn will lower banks'

profits, with the concern it will eventually destabilize the nation's financial

system.

     The BOJ must maintain financial system stability, as any worsening will

prevent favorable effects from easy policy filtering through to the real

economy, BOJ officials believe.

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