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ECONOMY > Finance

Editorial: Maintain stable financial system to support firms impacted by pandemic

  • May 8, 2020
  • , The Japan News , 1:23 p.m.
  • English Press

The shock caused by the spread of the new coronavirus could shake the financial system through various channels. To maintain stability, the authorities concerned should take all possible measures.

 

The Bank of Japan has published its biannual report examining the financial situation. The report pointed out that if the economic slump caused by the spread of the infectious disease is prolonged, it “could give rise to a negative feedback loop between the real economy and the financial sector.”

 

Should the current situation develop into a financial crisis and banks’ reluctance to extend new loans grow, downward pressure on the economy would further increase. Such a situation must be avoided.

 

The top priority for financial institutions is to support as much as possible firms whose cash flow conditions have deteriorated due to the impact of the virus. It is hoped that the government will flexibly deal with repayments being postponed or new loans being offered, depending on the circumstances of borrowers.

 

If the number of corporate bankruptcies continues to increase without any measures being taken, financial institutions will be forced to dispose of huge amounts of bad loans. The loss in valuation caused by a decline in the prices of companies’ stockholdings is another cause for concern.

 

In its report, the central bank estimated that if there is a crisis comparable to the one following the collapse of Lehman Brothers in 2008, domestic banks could incur three consecutive years of net loss from fiscal 2020.

 

The coronavirus crisis is said to be more serious than the Lehman crisis. The future is uncertain. Domestic banks have sufficient equity capital at present, but depending on how the situation goes with infections, there may be no relief.

 

Financial institutions need to maintain sound management so that funds can reach companies smoothly. It is important for the government and financial sector to come up with measures in consideration of a prolonged global economic slump.

 

If a bank’s financial condition significantly deteriorates, increasing its capital with an injection of public funds may be an option. Local financial institutions should also seek ways to strengthen their management foundations through mergers and integrations.

 

Domestic banks have increased overseas investments and loans, which are considered relatively risky, in an effort to achieve higher yields. About 40% of their foreign debt holdings are rated lowest among investment-grade bonds. It is necessary to reexamine whether their risk management was appropriate.

 

Since March, it has become difficult to raise dollars around the world. This is because companies and funds are increasingly selling stocks and other assets to secure dollars, which are widely used in international settlements.

 

The central banks of Japan, the United States and Europe have expanded the mechanism for exchanging dollars and provided a large amount of the currency to private financial institutions. It is commendable that they stabilized the market with a swift response.

 

This is an example of international cooperation that utilizes a lesson learned from the Lehman shock. It is hoped that the government and the Bank of Japan will cooperate with other major countries to overcome difficulties.

 

— The original Japanese article appeared in The Yomiuri Shimbun on May 8, 2020.

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