By Makiko Yamazaki
TOKYO, April 21 (Reuters) – Japan needs to be vigilant against risks to its financial system stemming from developments in the Middle East, the central bank said on Tuesday, warning that prolonged tensions could keep energy costs elevated and increase corporate defaults.
“Japan’s financial system has been maintaining stability on the whole,” the Bank of Japan said in a semi-annual report.
But the report said higher energy prices could drive up corporate commodity procurement costs and impact supply chains, potentially raising default risks, even though lending by Japan’s three largest banks to the Middle East remains limited.
“It remains necessary to pay close attention to the possibility that this could have an impact on firms’ financial positions and their cash-flow management,” it said.
The report also flagged risks linked to growing activity by non-banks like hedge funds, private equity firms and private credit lenders.
Major Japanese banks have so far extended only about 9% of their total overseas lending to foreign funds, including private equity and credit, indicating that their exposure remains limited for now, according to the report.
However, the BOJ said the domestic banking sector is becoming more interconnected with foreign non-banks, warning that stress affecting non-banks in terms of credit or liquidity “could more easily spill over to banking sectors across multiple jurisdictions.”
Some private credit funds in the U.S. have faced high redemption requests as jittery retail investors run for the exits amid concerns over transparency, valuations and artificial-intelligence-related disruption.
Japan’s private credit market remains small due to companies’ relatively easy access to traditional bank lending, but Japanese banks have stepped up financing to global private credit funds in recent years in search of higher returns.
(Reporting by Makiko Yamazaki; Editing by Tom Hogue and Thomas Derpinghaus)
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