IMF: Japanese financial system 'at a critical crossroad'
Japan’s financial system has deep-rooted problems that need to be addressed to preserve the country’s wider economic health, according to the International Monetary Fund.
In its latest assessment of the Japanese financial system, the Washington-based lender warns that Japan’s slow economic growth and its banks’ large government debt holdings are challenging profitability and the functioning of the financial system.
There is wide divergence among Japanese funds when it comes to their financials allocation. Some managers have more than one-third of their portfolio in the sector while others have less than 10 per cent.
The IMF’s review warns that the financial system’s “massive holdings” of Japanese government bonds leaves it exposed to a spike in market yields while it calls for further strengthening of financial oversight. In addition, it says that bank profitability will remain weak and credit risk may rise unless the country secures a sustained economic recovery.
IMF monetary and capital markets department assistant director Udaibir Das says: “Japan is a prime example of how a country’s overall economic health and its financial system are so closely connected.
“A broad-based plan for financial reform could help Japan create an environment that enables private sector-led growth alongside an ambitious, multi-year reduction in government debt and deficits.”
However, the assessment highlight some strengths of the Japanese financial sector. These include restructuring to improve financial soundness, reduced nonperforming loans and stronger capital positions. Japan has already made some progress in improving its financial regulation, the review adds.
IMF monetary and capital markets department adviser Nicolas Blancher says: “It is remarkable that Japan’s financial system could withstand so well one of the most severe output contractions experienced among the Group of Eight advanced economies during the current global crisis.”
The JPMorgan Investment Funds Japan Focus fund has 35 per cent of its portfolio in financials, according to its latest factsheet. Meanwhile, the Henderson Japan Capital Growth fund has 26.7 per cent allocated the sector while GLG Japan Core Alpha fund has a 9.9 per cent overweight to banks.
In contrast, 7.51 per cent of the Axa Framlington Japan fund is held in financials. The Aberdeen Global Japanese Equity and Baillie Gifford Japanese funds have a respective 8 per cent and 7.9 per cent in the sector.
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