The Bank of Japan said on Monday it is closely monitoring bank lending to the real estate sector to guard against excessive credit that could lead to overheating and pose risks to financial stability. The BOJ does not currently see signs of a property bubble, according to a report it released on Monday. However, the central bank is concerned because the ratio of real estate investment to nominal gross domestic product is uncomfortably high and banks are extremely willing to extend loans to property developers.
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The BOJ also expressed concern about falling yields on office buildings in major cities, which suggests that investors have driven prices too high, the report showed. “On the whole, we are not in an environment of excessive risk taking or overheating in credit,” the BOJ said in the report. “Still, we need to monitor risks posed by the property sector and competition among banks to extend credit.” Commercial bank lending has been rising steadily since the BOJ launched its quantitative easing programme in 2013 to spur inflation and end decades of economic malaise.
Despite Japan struggling with low growth and depressed domestic consumption, property development has stood out, being one of the biggest beneficiaries of the increased lending, setting of a wave of residential and office development in Japan’s largest cities. The BOJ said commercial banks’ capital adequacy ratios are high enough to withstand financial shocks, according to the report. The report also said banks do not face any liquidity problems but should continue to carefully manage risks when extending new loans.