The Bank of Japan’s Financial System Report released on Friday warned of prolonged stress from rate hikes by central banks, although financial institutions were assessed to have sufficient capital and liquidity.

“The period of stress may be prolonged further as policy rate hikes by central banks are continued and concerns about a slowdown in foreign economies are spreading. Financial and capital markets have continued to be nervous,” the FSR said.

The FSR also warned: “From a long-term perspective, if financial institutions' core profitability were to stagnate, financial intermediation could be impaired due to a decline in loss-absorbing capacity, or vulnerabilities in the financial system could increase through excessive risk-taking.”

“Japanese financial institutions (FIs) have kept sufficient capital and liquidity even under various types of stress since the outbreak of COVID-19, including supply constraints and rises in energy and raw material prices under the normalization of economic activity and the materialization of geopolitical risks,” the review said.