Nevertheless, if financial institutions in Japan become more risk averse due to concerns over overseas financial markets, for example, and increasingly prefer to hold JGBs, this may tighten supply and demand conditions of JGBs and in turn abruptly make it difficult for the Bank to continue with its JGB purchases.
The turbulence also seems to signal the need for changes in the financial system that are likely to centre on issues such as transparency – including the links between on- and off-balance-sheet vehicles – making improvements to risk management frameworks, valuation standards and market functioning including looking at the role of rating agencies.