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BOJ says Japan’s banking system stable, warns of risks -Breaking

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© Reuters. FILEPHOTO: A protective mask-wearing man walks by Bank of Japan’s headquarters amid the outbreak of coronavirus disease COVID-19 in Tokyo (Japan), May 22, 2020.

By Leika Kihara

TOKYO, Reuters – Japan’s banking system is generally stable. However, financial institutions may face risk due to a potential increase in credit costs as a result of a delayed economic recovery. The Bank of Japan (BOJ), issued a report Thursday.

In the event that a market correction is rapid, financial institutions may also face losses to their investments in securities, according the BOJ. The central bank should remain vigilant.

As the global recovery continues, credit risk from overseas loans will be contained. However, some portfolios are showing signs of deterioration that may be seriously affected by the pandemic,” stated the BOJ in its semiannual analysis of Japan’s banking system.

The report revealed that stress tests showed the vulnerability of Japanese banks for market swings due to the expected withdrawal from U.S.monetary stimulus.

The markets expect that the Federal Reserve will announce bond tapering plans for November. Some even project an increase in interest rates as soon as next year.

The report stated that if U.S. interest rates increase 100 basis points over the next year, Japanese banks operating globally will have their capital ratio fall to 9.6% from the 12.5% currently.

The report indicated that a further decline in Japan’s economy could be devastating for banks that are refocusing their efforts on domestic operations. Their capital adequacy ratio fell to 9.5%, from 10.1%.

The report stated that “In the case of a significant and rapid adjustment to global financial markets financial institutions’ health could deteriorate, disrupting financial intermediation which could further harm Japan’s economy.”

Additionally, the BOJ encouraged Japanese banks to look for other sources of dollar funds to help them expand abroad investment and lending.

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