Japan major banks to lose 3.7 tn yen if yields rise 1%: BOJ

Japan's financial sector faces increased interest rate risk due to banks' large holdings of government bonds.

Japan’s financial sector faces increased interest rate risk due to banks’ large holdings of government bonds and major banks would lose 3.7 trillion yen if yields rose by 1 per cent,the Bank of Japan said on Friday.

However,major banks’ Tier I capital ratio,which is used to measure financial strength,would be around 13 per cent,the BOJ said,suggesting that major banks could tolerate a spike in yields.

The forecasts,issued in a semi-annual BOJ report on the financial system,comes a week after the International Monetary Fund said Japan’s lenders are overloaded with JGBs and this is a central financial stability concern.

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Japan’s public debt burden is the worst in the world at nearly twice the size of its $5 trillion economy,but domestic investors hold most of this debt as commercial banks tend to invest deposits in JGBs instead of lending to other firms.

Japan’s regional banks would lose 3 trillion yen ($37.86 billion) on their JGB holdings,while credit unions would lose 1.6 trillion yen if yields rose 1 percent,the BOJ said.

Still,Tier I capital ratios at regional banks and credit unions would likely remain above 20 per cent,the BOJ said. Investors and economists usually consider a Tier I capital ratio of 8 to 10 per cent to be desirable.

Interest rate risk is rising at regional banks and credit unions as they increase the average duration of JGBs on their balance sheets to boost earnings,a BOJ official told reporters.

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Large banks are under less pressure to increase durations as they have been increasing earnings by lending overseas,the official said.

Government debt accounted for 24 per cent of banks’ assets at the end of last year,which is higher than other advanced economies and could rise to 30 per cent in 2017,according to IMF forecasts.