BoJ: Japan's financial system remains broadly stable

Japan’s financial system remains broadly stable. That was the assessment in the Bank of Japan (BoJ) semi-annual Financial System Report published on Friday.

BoJ Financial System Report: key findings

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

Current financial activity shows no significant financial imbalances.

The impact of factors including the situation in the Middle East, AI-related investment and developments in the non-bank sector requires continued close monitoring.

Close attention remains warranted for movements in asset prices, including property and equities.

The potential for increased portfolio concentration among private funds merits attention.

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

Rising crude oil prices leave some firms relatively vulnerable.

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

USD/JPY market response

156.94 is the USD/JPY exchange rate at the time of writing. The pair is 0.01% lower on the day.

Bank of Japan: key questions answered

Bank of Japan: role and mandate

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

Bank of Japan’s monetary policy path

In 2013, against a backdrop of low inflation, the Bank of Japan adopted ultra-loose monetary policy to support economic activity and lift inflation. Quantitative and Qualitative Easing (QQE) underpins this approach: the bank prints money to purchase assets, including government and corporate bonds, and inject liquidity. Further easing followed in 2016 as the bank reinforced its strategy, initially introducing negative interest rates and subsequently taking direct control of its 10-year government bond yield. An interest rate increase in March 2024 marked the BoJ’s effective retreat from its ultra-loose monetary stance.

Bank of Japan policy and the Japanese Yen

The Yen weakened against its major currency counterparts as a result of the Bank’s extensive stimulus. In 2022 and 2023, that depreciation intensified as monetary policy increasingly diverged between the Bank of Japan and other major central banks. Those banks raised interest rates sharply to tackle inflation at multi-decade highs. With the BoJ maintaining its policy, interest rate differentials with other currencies widened, weighing on the Yen. A partial reversal followed in 2024 after the BoJ chose to move away from its ultra-loose stance.

Drivers of the Bank of Japan’s shift from ultra-loose policy

Japanese inflation rose above the BoJ’s 2% target as Yen weakness and a surge in global energy prices pushed prices higher. Expectations of domestic wage growth, a key driver of inflation, also helped prompt the policy shift.