BoJ: Overall stability has been maintained in Japan's financial system

Japan’s financial system has remained broadly stable, according to the Bank of Japan (BoJ), which released its semi-annual Financial System Report on Friday.

What are the key findings of the BoJ’s Financial System Report?

Overall stability has been maintained across Japan’s financial system.

Current financial activity has shown no significant financial imbalances.

Continued close monitoring is necessary to assess the impact of factors including the situation in the Middle East, AI-related investment and developments in the non-bank sector.

Movements in asset prices, including property and share prices, still require close scrutiny.

Attention is warranted to the potential for increased concentration in private funds’ portfolios.

Profits appear to be under pressure from rising raw material and energy costs, particularly among SMEs.

Some firms are relatively vulnerable to increases in crude oil prices.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

How is the market responding?

USD/JPY is trading at 156.94 at the time of writing, a decline of 0.01% on the day.

Bank of Japan: key questions answered

What role does the Bank of Japan play?

As Japan’s central bank, the Bank of Japan (BoJ) determines the country’s monetary policy. Its responsibilities include issuing banknotes and managing currency and monetary conditions to maintain price stability, with an inflation target of around 2%.

How has the Bank of Japan’s policy evolved?

Against a backdrop of low inflation, the Bank of Japan adopted an ultra-loose monetary policy in 2013 to support the economy and lift inflation. Underpinning this approach is Quantitative and Qualitative Easing (QQE), which involves printing banknotes to purchase assets, including government and corporate bonds, and inject liquidity. The bank stepped up this strategy in 2016, easing policy further by introducing negative interest rates before moving to directly control the yield on its 10-year government bonds. A rate increase in March 2024 marked the BoJ’s effective retreat from its ultra-loose monetary stance.

How is the Japanese Yen affected by Bank of Japan decisions?

The Yen weakened against its major currency counterparts as a result of the Bank’s extensive stimulus measures. That depreciation intensified in 2022 and 2023 as the policy gap widened between the Bank of Japan and other major central banks, which raised interest rates sharply to tackle inflation at multi-decade highs. By widening interest rate differentials with other currencies, the BoJ’s stance put downward pressure on the Yen. In 2024, the decision to move away from ultra-loose policy brought a partial reversal of this trend.

What prompted the Bank of Japan to begin withdrawing its ultra-loose policy?

Japanese inflation rose above the BoJ’s 2% target as a weaker Yen and surging global energy prices pushed prices higher. Expectations of salary increases in Japan, a key driver of inflation, also helped prompt the policy shift.