Japanese Yen Mixed As BoJ Warns of Risks to Financial Stability

The Japanese yen is trading mixed against its most-traded currency rivals as the central bank is sounding the alarm on risks to financial stability in the wake of the coronavirus. This comes as the federal government has unleashed a massive stimulus package that extends a lifeline to consumers and the private sector, which is expected to weigh on Tokyo’s budget. With the country under a state of emergency and policymakers trying everything to stave off a recession, what else could Japan do?

In its semi-annual Financial System Report, the Bank of Japan (BoJ) identified three significant risks to the health of the nation’s institutions. According to governor Haruhiko Kuroda and his colleagues, higher credit costs, security investment losses, and foreign currency funding woes are all threats to the stability of the financial system.
Although the BoJ does not anticipate a financial crisis emanating from the economic shock the COVID-19 pandemic caused, it does worry about certain vulnerabilities amassing due to 0% interest rates. The BoJ added that public officials had taken considerable action to prevent the virus outbreak from metastasizing into a credit crunch. At the same time, it warns that the business cycle was already maturing when the coronavirus shut down the global economy.
For now, the central bank will do what it can to ensure banks are lending to meet the demand for working capital and not cracking down on struggling borrowers.

Facing a sudden erosion in sales and profits, firms around the world have increased demand for funds. As a result, financial institutions’ capital and liquidity have come under intense pressure.

Should the substantial deterioration in the real economy be prolonged, full-fledged financial adjustments through such vulnerabilities could give rise to a negative feedback loop between the real economy and the financial sector.

In Japan’s case, its economy was slowing down before pandemic, and the country was considering various stimulus efforts to spur growth while also trying to bring the budget under control. With fiscal concerns out the window, Tokyo and other governments have ramped up spending to contain the situation. Will Japan be successful in capping the coronavirus’ damage? The early data is forecasting tough times.
March exports collapsed at an annualized rate of -11.7%, driven by a crash in sales of automobiles, transportation equipment, machinery tools, chemicals, and manufactured foods. Imports also slumped to a 12-month rate of -5% last month, caused by a drop in receipts for mineral fuels, liquid natural gas (LNG), apparel, machinery, manufactured goods, and computers.
Next week, crucial Jibun Bank purchasing managers’ index (PMI) readings for April will be released, and projections show a decline from March.
A new report also highlighted that the BoJ lost up to $27 billion in its exchange-traded fund (ETF) investments due to the market rout. The BoJ, which possesses nearly $300 billion in ETFs, has added to its positions in recent weeks to cushion the Nikkei.
The USD/JPY currency pair rose 0.08% to 107.85, from an opening of 107.77, at 16:23 GMT on Wednesday. The EUR/JPY slipped 0.25% to 116.72, from an opening of 117.01.

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