Japan banking regulator sees no big impact from BOJ shift for now

By Makiko Yamazaki and Ritsuko Shimizu

TOKYO (Reuters) – The Bank of Japan’s latest policy shift would not have a major impact on Japanese banks unless there are sudden spikes in domestic bond yields, the new head of Japan’s financial regulator told Reuters on Friday.

The central bank’s relaxation of its cap on bond yields last week has caused the 10-year government bond (JGB) yield to briefly cross 0.6% for the first time since 2014.

“With long-term interest rates staying around 0.6%, I don’t think it will have much of an impact on Japanese banks,” Teruhisa Kurita, who became the commissioner of the Financial Services Agency last month, said in an interview.

Higher JBG yields could increase unrealised losses on domestic bonds held by Japanese banks, although such losses could be offset by stronger net interest margins from their lending business.

Large banks say they have shied away from buying JGBs or shortened the duration of their bond portfolios in anticipation of higher yields, but analysts say some smaller banks do not have such flexibility.

Kurita said a level of caution was much higher earlier this year, when the collapse of Silicon Valley Bank put Japanese regional banks’ foreign bond portfolios under investor scrutiny.

“Japanese banks were affected by steep rises in U.S. interest rates,” he said. “But unless rates surge in a short period of time in Japan the way they did in the United States, I believe the banks can handle the situation.”

Kurita, however, stressed that the banks need to be well prepared in risk management to be able to respond to potential market volatility, as risk factors could come from overseas.

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