Japanese banks should stay vigilant against market tail risks, BOJ says

TOKYO (Reuters) – Japanese banks have sufficient capital bases but need to be vigilant against tail risks including developments in global financial markets and geopolitical perils, the Bank of Japan said on Thursday.

The capital and funding bases at Japanese banks are sufficient to withstand various stress events equivalent to the global financial crisis, the BOJ said in its report on the financial system.

“However, vigilance against tail risks, including developments in global financial markets and geopolitical risks, continues to be warranted,” it said.

The BOJ ended negative interest rates in March and hiked short-term rates to 0.25% in July, in a landmark shift away from a decade-long stimulus program aimed at firing up inflation.

The report also said there are a number of banks with high interest rate risks associated with securities investment, and urged careful management of interest rate risks.

Despite rising corporate bankruptcies in the country, banks’ credit cost ratios have remained subdued, helped by a build-up of precautionary loan-loss provisions during the pandemic, the report said.

But it also noted that there have been bankruptcies due to rising prices and labor shortages.

“While it is unlikely that the credit cost ratio overall will increase substantially, with the price pass-through gradually spreading, future developments warrant careful attention,” the BOJ report said.