Yet there is substantial empirical evidence that monetary policy encourages risk-taking in the financial system, and the risks of an asset price correction are increasing. Dealing with such risks solely through macroprudential policy is challenging. The effectiveness of macroprudential policies is curtailed by the presence of foreign banks and non-bank financial firms lending to households.
As for the Japanese financial system, there are some encouraging signs that, especially at major banks, various efforts to restore banks’ financial soundness are paying off, although the system is still in a difficult situation as a whole.