By Leika Kihara
TOKYO, May 26 (Reuters) – Bank of Japan Governor Haruhiko
Kuroda said the country’s financial institutions have sufficient
buffers against losses they may incur from rises in bond yields,
as long as the market moves are driven by prospects of an
economic recovery.
The central bank will also be vigilant to any signs of
overheating of asset prices or excessive risk-taking by
financial institutions, the BOJ chief said, adding that there
were no signs of that now.
“Japan’s financial system as a whole seems to possess
sufficient resilience against such shocks as a rise in interest
rates and deterioration in economic conditions,” Kuroda told a
seminar involving academics on Sunday.
The BOJ unleashed the world’s most intense burst of stimulus
last month, promising to inject $1.4 trillion into the economy
in less than two years via massive asset purchases to meet its
pledge of achieving 2 percent inflation in roughly two years.
But the central bank’s huge bond purchases have jolted bond
markets and sent the 10-year yield to its highest in a year last
week, casting a cloud over the effectiveness of its easing that
attempts to push down borrowing costs.
Declines in bond prices, and a resulting rise in yields,
hurts the value of Japanese banks’ huge bond holdings and boosts
the cost of funding the country’s massive public debt.
Kuroda said estimates by the BOJ in April showed a rise in
interest rates by around 1-3 percentage points would not cause
major concerns over Japan’s financial system, as long as the
rise is accompanied by improvements in the economy.
That is because the economic recovery would lead to
increased lending and help improve banks’ earnings, he said.
But Japanese banks will take a hit if the rise in interest
rates is not accompanied by improvements in the economy and is
driven by heightened concern over Japan’s fiscal state, Kuroda
said, calling on the government to keep up efforts to curb the
country’s huge debt.
“The BOJ made a clear commitment to achieve its price
target. I’d like to call on the government to map out a clear
plan to restore Japan’s fiscal health and a growth strategy –
and most importantly, ask that they be implemented,” he said.
The BOJ will also be mindful of any signs of overheating in
asset prices and take “appropriate action” if financial
imbalances emerge, Kuroda said, suggesting that the BOJ will
seek to unwind its ultra-loose policy if the flood of money it
is pumping causes an unwelcome asset price bubble.
“There is no sign at this point of excessively bullish
expectations in asset markets or in the activities of financial
institutions,” he added, stressing that current economic
conditions do not warrant any tightening of monetary policy in
the forseeable future.
The aggressive monetary stimulus launched by Kuroda, which
is meant to vanquish 15 years of entrenched deflation by
expanding the supply of money at an annual pace of 60
trillion($593 billion) to 70 trillion yen, has sent stocks
soaring to 5-1/2-year highs.
But the mood soured in the past week after subdued Chinese
factory data and expectations that the U.S. Federal Reserve may
unwind its stimulus hit global shares. Tokyo’s Nikkei average
suffered its worst one-day loss in two years on Thursday.
