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[TOKYO] Japanese banks made deep cuts in its bond holdings and spent double that amount boosting loans and securities investment, a Bank of Japan report showed, a sign the central bank's aggressive bond buying is nudging them into taking on more risk.
Since the central bank deployed its stimulus programme two years ago, domestic financial institutions saw their balance sheet expand by 124 trillion yen (S$1.4 trillion) of which 89 trillion yen were in cash and deposits, the BOJ's semi-annual report on Japan's financial system showed on Wednesday.
As the BOJ gobbled up Japanese government bonds (JGB) aggressively to pump cash into the market, the financial institutions cut their JGB holdings by 34 trillion yen and spent nearly double that amount increasing domestic and overseas lending as well as investing in other securities, it showed.
The data is evidence that one of the key transmission channels of the BOJ's stimulus, which is to nudge banks into boosting lending and investment in risker assets rather than hoard JGBs, is making some headway.
But the report also urged Japanese financial institutions to be mindful of risks as they increase overseas lending, such as increased exposure to global market volatility.
Despite reducing JGB holdings, financial institutions would still incur a total 7.5 trillion yen in losses if long-term interest rates rose by one percentage point, the report said.
"While that is about 10 per cent lower than the peak of 8.3 trillion yen as of end-March 2013, it's still a significantly high level from a long-term perspective," the report warned.
A chart measuring risk-taking behaviour in various asset markets showed signs of some overheating in property investment partly as overseas investors piled into Japan's market, the report said.
But the BOJ said there were no signs of excessive risk-taking in the market as investors were mainly using the cash they have at hand, rather than borrow, to buy property.