Japan's financial watchdog is keeping a close watch on how banks manage the risks tied to climbing interest rates, spanning everything from bond holdings and corporate lending to ultra-long-term mortgages. Yutaka Ito, head of the Financial Services Agency (FSA), said in an interview that the agency already has a firm grasp on the asset positions of financial institutions and is now reviewing their risk management frameworks. “If shortcomings are found, we will push them to take corrective action,” Ito stated.

After years of deflation, Japan's gradual return to more normal interest rate levels is prompting the FSA to ensure banks and other financial players can shift smoothly through this transition. Recently, rising rates have boosted the profitability of lending businesses at Japanese banks, sending their shares and earnings sharply higher. At the same time, though, growing inflation and government spending concerns have driven the country's bond yields to multi-decade highs, dealing a heavy blow to the value of domestic bonds held on bank balance sheets. With markets widely anticipating that the Bank of Japan will accelerate its pace of rate hikes to keep prices stable, these bond portfolios could remain under pressure.

In his second year at the helm of the FSA, Ito noted that, industry-wide, unrealised bond losses are still at a “manageable level,” and the regulator will not issue specific directives to banks or other financial institutions on how to handle those losses. Still, the agency is closely monitoring how each firm is responding to the situation. “They need to make business decisions based on solid strategies and forward-looking judgments,” he added.