Japan Regulator to Monitor Potential Impact of BOJ on Regional Banks, According to Reuters

By Makiko Yamazaki

TOKYO – Japan’s financial regulator is set to closely monitor the impact of central bank policies on regional banks as the country prepares to normalize its monetary settings after years of substantial easing.

The Financial Services Agency (FSA) indicated in its annual policy outlook that it will assess how potential shifts in financial markets and client circumstances may influence the profitability and stability of regional banks.

Recently, the Bank of Japan adjusted its yield curve control (YCC) policy, allowing interest rates to increase more flexibly. This measure is officially aimed at maintaining easing, but many market observers view it as the first step toward unwinding years of stimulus measures.

Rising interest rates could lead to increased unrealized losses on the domestic bonds held by Japanese banks. However, these losses might be balanced out by enhanced net interest margins resulting from their lending operations.

Larger banks have already shortened the duration of their bond portfolios in anticipation of higher yields. In contrast, analysts indicate that many smaller regional banks may not have the same level of flexibility.

The FSA emphasized that it will encourage regional banks to proactively take the necessary measures in response to potential economic and financial changes.

The annual policy outlook serves as a framework for the FSA’s oversight and guidance of banks and other financial institutions, outlining future legislative amendments as well.