TOKYO (Reuters) - Japan's financial regulator is pushing banks to take more risks and lend more to medium and small-sized businesses as Prime Minister Shinzo Abe tries to lift the economy out of a 15-year-old deflationary funk through a policy bag of monetary and fiscal measures.
Japan emerged from recession in 2012 and data for much of this year has shown the benefits of Abe's reflationary policies and the BOJ's aggressive stimulus. Still, upbeat signs are mostly limited to big cities and large companies, leaving many small businesses without clear growth prospects yet.
The Financial Services Agency's (FSA) call for more risk taking in lending marks a break from traditional regulator's approach of keeping lenders from racking up bad debts, which almost sank the country's banking system after a property and credit bubble burst in the 1990s.
"It's one of core missions of financial institutions to boldly take risks (to contribute) to the real economy," FSA said in its annual policy guidance for its operating year started in July.
FSA said, while it will boost its oversight on the soundness of banks, including concentrations of loan portfolios to particular large borrowers, it will "respect banks' judgment" in making small loans, giving lenders more discretion over extending credit to small businesses.
The regulator also said it will encourage and closely monitor local lenders' efforts to increase new loans.
The FSA also pointed out banks' massive holdings of Japanese government bonds (JGBs) are one of risk factors it will watch closely.
Given volatile market moves following the Bank of Japan's massive monetary easing earlier this year, the regulator said it will pay attention to banks' readiness to risks such as a spike in long-term yields, which would push down the value of banks' JGB holdings.
(Reporting by Taiga Uranaka and Horiyuki Hirata; Writing by Nathan Layne; Editing by Shinichi Saoshiro & Kim Coghill)