BOJ sees ‘sound and resilient’ financial system despite some jitters

By Tetsushi Kajimoto

TOKYO (Reuters) – Japan’s financial system has remained “sound and resilient” despite heightened financial sector jitters in the West stemming from U.S. bank failures in March, the Bank of Japan said in its semi-annual financial system report.

However, the central bank also said that vigilance against tail risks were warranted.

“Future developments remain highly uncertain as financial and capital markets have been nervous,” the bank said in its financial system report. “Although the quality of banks’ domestic and foreign loan portfolios has remained high on the whole, some loans entail high credit risk.”

A bitter memory runs deep among Japanese policymakers, who had initially underestimated the impact of the collapse of U.S. investment bank Lehman Brothers in 2008, describing it as a “bee sting”.

Eventually, the failure of the U.S. bank developed into a fully fledged global financial crisis.

Japanese policymakers and analysts see the failure of the two U.S. banks this time as different in nature from the last financial crisis, which stemmed from subprime mortgage loans and triggered a credit crunch.

The recent banking problems occurred against the backdrop of U.S. aggressive monetary tightening after years of easy money policy.

“To ensure the stability of Japan’s financial system, it is necessary to examine the risks of contraction and overheating in the financial system and address potential vulnerabilities appropriately,” the bank said.

Earlier on Friday, Finance Minister Shunichi Suzuki called for debate on financial sector regulations given the impact of social media on spreading credit worries, raising the risk of triggering bank runs.

The minister also revealed that roughly 140 billion yen ($1.05 billion) of Credit Suisse’s Additional Tier-1 bonds, or contingent convertible bonds, so-called CoCo bonds, were sold to wealthy domestic investors in Japan.

“The underlying financial markets have regained calm,” Suzuki said. “It’s regrettable that certain investors were affected. Given cuts in principal, it’s important for the brokerages who sold the products to respond to customers in a cordial manner.”

($1 = 133.8100 yen)

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