The Nikkei stock index closed at a record high on Tuesday after Sanae Takaichi, a supporter of fiscal stimulus, clinched a parliamentary vote to become the nation’s first female prime minister. The index has surged nearly 24% so far this year.
The growing presence of foreign hedge funds, which have increased leverage in trading Japanese government bonds (JGB), could also amplify market volatility, the Bank of Japan said in a semi-annual report on the country’s financial system.
“In the event of unexpected changes in market environment, hedge funds’ rapid position adjustments accompanied by deleveraging can amplify volatility in asset prices. If such adjustments occur in government bond markets, this could affect a wide range of financial instruments in Japan,” it said.
Super-long JGB yields spiked in April and May as hedge funds sold bonds in response to political talk of big fiscal spending that could lead to an increase in debt issuance.
While yields have stabilised since then, some analysts warn that Takaichi’s plan to deploy a sizeable spending package could trigger another bond sell-off, and weaken the yen.The financial system report included a heat map, or a visual representation of financial imbalances, for several asset prices and credit conditions with “red” pointing to overheating.The heat map showed “red” for stock prices. The 13 other categories were all “green,” signaling no clear deviation from trend.
“Given that Japanese banks have a certain amount of market risk associated with stockholdings, close attention should be paid to developments in risky asset prices, including stock prices,” the report said.
Real estate prices have also been rising, particularly in major metropolitan areas, due partly to demand for investment including from foreign investors, the report said.
“If market participants’ view on future real estate demand changes, a correction in real estate prices could occur,” the report said.
“Given that banks’ real estate-related exposures have been on an uptrend, developments in real estate markets continue to warrant attention.”
However, the BOJ report also said that Japan’s financial system remain stable, with banks possessing a solid capital base and stable funding to withstand various stresses.
The BOJ monitors for signs of financial imbalances, such as asset price bubbles and excess credit expansion, that could cause financial crises. While economic and price moves are the main factors determining monetary policy, the central bank takes into account the findings on financial imbalances.
Critics blame the BOJ’s prolonged ultra-low interest rates and the weak yen, which makes it cheaper for foreign players to invest in Japan, for pushing up asset and property prices.
New condominium prices in the Tokyo metropolitan area rose 20.4% in April-September on average from year-before levels, data by the Real Estate Economic Institute showed.
The BOJ exited a decade-long, radical stimulus programme last year and raised short-term interest rates to 0.5% in January on the view Japan was on the cusp of sustainably hitting its 2% inflation target.
But Governor Kazuo Ueda has stressed the need to tread cautiously in further rate hikes on uncertainty over the impact of U.S. tariffs on Japan’s economy. Most economists polled by Reuters
earlier this month expect it will raise rates again in the fourth quarter, possibly as early as next week.