The following financial stability reports were published and made available recently:
“Japan’s financial system as a whole has been maintaining stability.
Judging from developments in financial markets and financial institutions’ behavior, there is no indication warning of financial imbalances such as excessively bullish expectations. The volatility of stock prices temporarily increased from the beginning of 2014, but volatility has generally been low in the Japanese government bond (JGB) and foreign exchange markets.
Capital bases of financial institutions such as banks and shinkin banks have been adequate on the whole, and these institutions have sufficient funding liquidity. Thus, they generally have strong resilience against various economic and financial shocks, as they would maintain their capital adequacy ratios above regulatory levels even under stresses arising in scenarios involving a significant economic downturn and a substantial rise in interest rates. However, attention should be paid to the possibility that the impacts of an economic downturn and an interest rate rise spread to the financial system, depending on the speed and extent of the economic downturn and the rise in interest rates, as well as the factors behind them. Some financial institutions have relatively weak capital bases, and are behind the curve in improving asset quality following the Lehman shock. These institutions need to steadily strengthen their capital.
Financial intermediation has operated more smoothly than it did at the time of the previous Report.
Financial institutions have adopted more proactive lending attitudes at home and abroad, and some of them have increasingly taken on risks associated with securities investment, albeit to a small extent. Financial intermediation through financial markets has become prevalent. In these circumstances, financial conditions among firms and households have become more accommodative. Financial institutions’ loans have grown at a faster pace, particularly those to small and medium-sized firms, and these institutions have extended loans to a wider range of industries and regions.
The recent economic recovery has had positive effects on the profits of financial institutions. The positive effects include an increase in profits related to stock investment, an increase in sales of stock investment trusts, and a decrease in credit costs. However, the core profitability of domestic business operations relating to deposits and loans has remained on a downtrend, mainly due to the continued narrowing of interest rate spreads on loans. Business conditions among regional financial institutions are particularly severe. The decline in core profitability does not immediately affect the stability or functioning of the overall financial system. Nonetheless, the declining trend in core profitability is a challenge that should be resolved because it may constrain financial institutions’ ability to absorb losses and take on risks in the medium to long term.”
Financial stability reports can be found here.