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Japan

Bank of Japan chief warns country’s struggling financial institutions not to engage in excessive risk taking

  • Regional banks across the country are taking an earnings hit from ultra-low interest rates and a general decline in borrowing
PUBLISHED : Monday, 19 November, 2018, 5:04pm
UPDATED : Monday, 19 November, 2018, 5:04pm

Bank of Japan Governor Haruhiko Kuroda on Monday warned against unbridled risk taking by financial institutions that are struggling to maintain profit margins as the country’s population shrinks.

Regional banks across Japan are seeing their earnings hit by a one-two punch of the central bank’s ultra-low interest rate policy and a decline in people and local businesses that take out loans and pay interest.

“As downward pressure on banks’ profits continues, we need to be mindful of the possible consequences of banks’ engagement in excessive risk taking,” Kuroda said in speech at an international financial forum in Tokyo.

BOJ policymakers have expressed concern over banks investing in risky assets and increasing their exposure to overseas markets in their search for higher margins.

If appropriate risk management measures are not taken … the stability of the financial system could be threatened
Bank of Japan Governor Haruhiko Kuroda

“If appropriate risk management measures are not taken and the continued decline in profits lead to insufficient capital bases, credit costs could rise sharply, and the stability of the financial system could be threatened in the event of a large exogenous shock that results in an economic downturn,” he added.

Kuroda stressed that the central bank is determined to continue large-scale monetary easing to achieve its 2 per cent inflation target, while stressing that so far he has had more success than his predecessors in lifting the economy.

“The unemployment rate has declined to 2.3 per cent. The corporate sector is enjoying historic high levels of profit, so the real economy is doing quite well.”

“Although the inflation rate is still around 1 per cent, this does not mean that so-called QQE (quantitative and qualitative easing) over the past five years has failed. We are determined to continue the current accommodative monetary policy.”

Asked by an attendee for his thoughts on a recently published memoir by former BOJ Governor Masaaki Shirakawa, Kuroda was blunt.

“The Bank of Japan or any central bank is responsible for gaining price stability in the medium to long run” but “from 1998 through 2013, somehow monetary policy failed to … maintain price stability.”

Shirakawa was governor from 2008 until he stepped down in 2013 under pressure from the government of Prime Minister Shinzo Abe to ramp up monetary easing. He was succeeded by Kuroda.

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