BOJ voices confidence in Japan's banking system

Tokyo

JAPAN'S banking system remains stable as a whole and has sufficient buffers against risks, the central bank said in a semi-annual report, voicing confidence that domestic financial institutions can withstand the hit from the coronavirus crisis.

But the Bank of Japan (BOJ) warned that commercial banks were vulnerable to various risks including rising credit costs, as loans to pandemic-hit sectors like property developers may sour.

Major banks have also increased riskier overseas lending that requires vigilance due to sluggish global growth, the BOJ said on Thursday in the report analysing Japan's banking sector.

"Even in the case where Japan's economic recovery remains very moderate, its financial system is likely to remain highly robust," the bank said. "However, developments in the spread of Covid-19 and their impact on the domestic and overseas economies are subject to considerable uncertainty."

The report said government and central bank measures to ease corporate funding strains have played a significant role in preventing a spike in defaults and credit costs.

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In an analysis based on financial data of 2,400 listed firms and 730,000 small and medium-sized enterprises (SMEs), three-fourth of SMEs likely would have suffered red ink were it not for the relief measures, the report said.

But the pandemic could heighten risks for commercial banks that have loaded up on high-risk lending in search for yields amid years of ultra-low interest rates, it said.

Overseas lending makes up over 30 per cent of major banks' total loans. Most are loans to non-financial industries, of which 70 per cent are investment-grade status, the BOJ said.

But the ratio of investment-grade loans fall to around 40 per cent for loans that fund energy projects and purchases of big-ticket items like aircraft, it said.

A prolonged battle with Covid-19 could also strain Japan's economy and push more companies under, heightening financial system risks, the report said.

A stress test showed under the most severe-case economic downturn scenario, internationally active Japanese banks will see their capital ratio slump to 7.6 per cent from 12.2 per cent, the BOJ said. REUTERS