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Japan's imaginative monetary policy is putting banks in danger

Jake Cordell
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Japan economy stock market ticker
Japanese financial markets have been driven by action from the Bank of Japan this year (Source: Getty)

Fitch has sounded alarm bells over the health of Japanese banks in the face of the latest tinkering with monetary policy from the Bank of Japan (BoJ).

The ratings agency said it was worried the BoJ's increasingly unconventional approach to managing the country's cash supply could lead to "unintended consequences" for the financial sector as the economy tries to digest the implications.

The Bank of Japan is currently pumping ¥80 trillion (£613bn) a year into the economy in the form of quantitative easing, while its headline interest rates are currently minus 0.1 per cent. Last month the BoJ announced it would undertake a new programme which involves explicitly targeting the yield on the government's 10-year bonds. However, analysts are expecting the Bank will be forced to cut interest rates even further at some point in order to stoke growth and inflation in the world's third largest economy.

"The more complex these measures become, the greater the potential for unintended consequences," said Fitch.

It added: "The BoJ's steps into the unknown could even lead to banks becoming more cautious. Distortions in the bond market could be particularly dangerous for banks, which would be vulnerable ... if a normalisation of the bond market ever results in a sharp rise in yields."

Separate data from Bloomberg out this morning showed the number of bonds around the world trading at negative yield - where investors are effectively paying a premium or order to lend money - had increased by six per cent in September. The total now stands at $11.6 trillion (£9bn), just shy of the all-time high of $11.9 trillion reached in June.

Bond yields have been on a tumultuous ride in 2016 so far, with the EU referendum the latest event to trigger a downwards lurch in borrowing costs as investors rush into the safe havens of government debt.

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