International
Bank of Japan Flags Middle East Risks to Financial System, Corporate Cash Flow, Non-Bank Lenders
The Bank of Japan assesses that the nation's financial system remains broadly stable, but it must remain vigilant due to heightened geopolitical risks, particularly the ongoing tensions in the Middle East, according to the central bank's latest financial system report released Tuesday.The surge in crude oil prices following the escalation in the Middle East could elevate companies' commodity procurement costs and disrupt supply chains, increasing the risk of corporate defaults, the BOJ said.Such developments necessitate close attention to the possibility that prolonged tensions could adversely impact firms' financial positions and their cash-flow management, according to the report.Regarding lending exposure, Japanese banks have sufficient capital and stable funding bases, but their real estate-related lending has grown faster than overall loans, warranting careful monitoring, the report said.In overseas lending, banks have increased their exposure to foreign investment funds (including private equity and private credit funds) and data centers, which carry unique risk characteristics, the central bank said.While loans to these foreign funds and data centers currently maintain favorable credit ratings, their creditworthiness could change significantly due to shifts in asset valuations or technological innovations, according to the report.The report highlights growing concerns about non-bank financial intermediaries (NBFIs), including hedge funds, whose high-leverage activities in global bond markets could transmit stress to Japan's financial system.Foreign hedge funds have increased their presence in Japan's government bond market using repos and derivatives, and a sudden unwinding of their positions could reduce market liquidity.Additionally, the report flags risks from private credit funds, where recent investor redemptions have occurred, and notes that the relaxation of lending terms (such as payment-in-kind loans) may be delaying the recognition of credit defaults.
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