Banks in Japan too aggressive in risk-taking

Lending at Japanese banks is showing hints that it is creeping toward overheating, the central bank implied in a Monday report, as ultra-low interest rates push lenders to grow more aggressive with even less-profitable loans in real estate or small businesses. The October edition of the Bank of Japan's semiannual Financial System Report was upbeat on certain fronts. The nation's financial system "has been maintaining stability on the whole," it said, reusing April's phrasing. Though the report is sometimes referenced in crafting monetary policy, its content "does not press for revising" it, according to a BOJ official. In financial activities, the central bank noted "no signs of overheating as observed during the bubble period in the late 1980s" -- a revision to April's "no particular signs of overheating" that suggests cause for concern is gradually growing. June's reading of an index the bank uses to track financial activity, incorporating data from businesses and household finance as well as conditions in real estate and other areas, crept closer to the overheating line from the previous reading in March, reaching the highest levels since December 1990. One source of concern was increased low-interest lending to middle-risk companies as funding demand flags among more creditworthy borrowers. In a BOJ survey cited in Monday's report, many regional lenders reported that "loan interest rates for middle-risk firms do not adequately match credit costs through the business cycle." The report also pointed out that real-estate-related lending has been increasing even as the quality of both borrowers and expected rental property returns have worsened. Though excessive lending can give the economy a push in the near term, in a retreat it can leave banks with bad loans to dispose of, so the risk of a future downturn in gross domestic product growth increases as lending activity grows more aggressive. The BOJ employed an analytical approach called "GDP-at-risk" that calculates probability distributions for future growth.