Reuters reports that the Bank of Japan (BOJ) said in a report that Japan's banking system remains broadly stable but financial institutions could face risks including from a possible increase in credit costs caused by a delay in the economic recovery.
"Credit risk of overseas loans is generally contained as overseas economies recover on the whole. Nevertheless, there are signs of deterioration in some portfolios that seem to be severely affected by the pandemic," said the BOJ.
Stress tests highlighted the vulnerability of Japanese banks to potential market swings caused by an expected withdrawal of U.S. monetary stimulus, the report showed.
Under a scenario where U.S. long-term interest rates rise 100 basis points and hurt emerging economies, big Japanese banks with global operations will see their capital adequacy ratio slide to 9.6% in fiscal 2023 from the current 12.5%, the report said.
A further worsening of Japan's economy could deal a heavy blow to banks focusing on domestic operations with their capital adequacy ratio seen falling to 9.5% from 10.1%, the report showed.