Asia

Wednesday, April 17, 2019 - 02:03

MNI POLICY: BOJ Sees No Overheating; Warns On Capital Adequacy


TOKYO (MNI) - Despite rapid growth in real estate loans, the Bank of Japan still sees financial and economic activities as a whole showing no signs of overheating such as seen through the late 80's 'bubble', the BOJ's biannual Financial System Report released Wednesday said.

However, the report said "possible vulnerabilities of the real estate market warrant close attention."

The latest FSR again pointed to the accumulated risks caused by prolonged easy policy, but the comments will not prompt the BOJ board to unwind it anytime soon.

The report also said regional financial institutions have generally not been able to secure profits commensurate with the increase in risk-weighted assets, while their capital adequacy ratios and stress resilience have declined moderately."

"Should this situation persist, downward pressure on the real economy from the financial system could intensify in the event of stress, as the capital of financial institutions would decrease substantially due to increased credit costs and securities-related losses," the report warned.

--DOMESTIC PROFITS

The report also said that the profitability of domestic deposit-taking and lending activities has continued to decline, mostly caused by structural factors such as lowered growth expectations and the secular decline in loan demand, as well as the prolonged low interest rate environment."

--HEAT MAP

As MNI forecast earlier this month, the FSR's heat map shows that the real estate loans to GDP ratio turned "red," signalling an overheating for the first time since the end of 1990.

The BOJ doesn't see the red indicator as meaning there is a bubble in the sector and, having expected such a move, the bank will not take it too seriously.

--DOWNSIDE TAIL RISK

The latest report also said, "The recent expansion in the financial cycle has contributed to an increase in the downside tail risk from a somewhat longer-term perspective by building up pressure on balance sheet adjustments on the back of the cumulative effects of low interest rates."

It also said, "Some signs of changes are observed: credit costs appear to have begun increasing, albeit they are still at low levels, and investment in securities has also seen losses in foreign bonds and a decrease in room for realizing gains on securities."

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com
--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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