Japanese regulators scrutinise risk to banks of future interest rate rise

Japanese financial authorities are joining forces to scrutinise for the first time banks' exposure to a potential spike in interest rates, with a focus on the risks to regional lenders when the central bank eventually ends its massive easing.

Japan's 105 regional lenders hold 40.8 trillion yen (HK$3.09 trillion) of Japanese government bonds (JGBs) as investment, equal to about 8 per cent of gross domestic product. Policymakers worry that if economic growth picks up or investors think the central bank is leaning towards tapering its JGB purchases, yields could surge and the value of the JGBs held by the banks would fall.

Regional banks have been in a bind. With local economies depopulating in this fast-ageing society, loan demand tepid, and scant resources to seek profits overseas, they have little alternative for their huge deposits - about half of the country's - but to hold JGBs.

While the risks look small now with Japan's economy recovering and interest rates extremely low, the country's financial authorities are not letting down their guard. The health of regional banks is key to the stability of Japan's overall financial system and the livelihoods of millions of people.

The Financial Services Agency and the Bank of Japan are scrutinising the smaller lenders' interest-rate risk as they jointly step up their "macroprudential" oversight - looking to identify and minimise risks to the financial system amid broad shifts in the economy, people involved in the process say.