Financial Overheating Risks Reach Postbubble Highs: BOJ

October 23, 2018

Tokyo- Overheating risks related to such financial activities as corporate and real estate loans in Japan have reached the highest levels since the collapse of the country's bubble economy in the early 1990s, on the back of continuously low domestic interest rates, the Bank of Japan said in a report on Monday.

Although there are currently no signs of overheating as observed during the bubble period in the late 1980s, the BOJ will closely monitor whether financial institutions, companies and households are becoming overly optimistic amid the BOJ's continued monetary easing, an official of the central bank's Financial System and Bank Examination Department said.

In its Financial System Report, the BOJ said that financial institutions' lending attitudes and real estate loans, as well as stock prices, are getting close to overheating.

With banks' lending attitudes being accommodative on the back of massive monetary easing, loans to companies with relatively low creditworthiness have increased, the report said.

The balance of real estate loans has reached a record high, topping the peak level in the 1980s and 1990s, it added.

Analyzing the soundness of financial institutions, including regional banks, the report noted that their profitability has continued declining as interest rates in the country are staying low for a long period and the number of companies has dropped.

Amid intensifying competition on lending, regional banks may not be generating returns commensurate with risks, leading to declines in their capital-to-asset ratios, the report said.

Also in the report, the BOJ revealed results of stress tests under a scenario that financial and economic conditions at home and abroad have deteriorated to levels similar to those after the collapse of U.S. investment bank Lehman Brothers in 2008.

The BOJ projected that some 90 pct of about 360 financial institutions, mainly regional banks, would suffer net losses due to bad loan disposal costs and losses from their securities holdings. Jiji Press