TOKYO (MNI) – The International Monetary Fund on Wednesday reminded
Japanese policymakers that a surge in government bond yields on concerns
about Tokyo’s will to contain the huge public debt could hurt smaller
banks that have built up long-term JGB holdings.
The vulnerability of smaller banks has been a focus of debate in
parliament as they have bought JGBs with longer maturities in quest of
higher returns amid generally weak credit demand, more aggressively
compared with major domestic banks.
The European debt crisis generated safe-haven flows to the dollar
and the yen away from the euro, which sent the yen to record highs last
year, hurting export profits. The prolonged global slowdown has
depressed Japan’s exports and production and thus credit demand from the
private sector.
“Banks have responded by increasing their holdings of government
bonds. The rising concentration of government bond risk in the domestic
banking system is a central financial stability concern in Japan,” the
IMF said in its Global Financial Stability Assessment.
“Stress tests of the major banks reveal that, over the near term,
they are able to handle moderately large shocks to government bond
prices,” it said. “But a potential sharp rise in government bond yields
in the medium term could pose sizable risks to Japan’s regional banks.”
Japanese leaders have said the domestic financial system has been
stable as banks had slashed bad loans before the 2008 global financial
crisis and the current global economic slump.
The U.S. and Japanese debt markets have attracted safe-haven buying
from around the world, pushing down JGB yields to very low levels.
But Bank of Japan Governor Masaaki Shirakawa has repeatedly warned
that low and stable long-term interest rates would not last forever and
that investor confidence in JGBs could be lost if the government failed
to keep showing its resolve to conduct fiscal reform.
The IMF also said while the yen could surge in the wake of a
natural disaster on speculation of repatriation of foreign assets, “the
threat of an erosion of confidence in domestic policy, or, over the
longer run, of a deterioration in the current account, might cause
substantial depreciation.”
“The market has resolved these two competing forces by anticipating
a very high level of medium-term volatility in the dollar-yen exchange
rate, well above realized volatility and high relative to past crises.”
tokyo@marketnews.com
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[TOPICS: M$J$$$,M$A$$$,MMJBJ$]
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