The Bank of Japan kept monetary policy steady on Wednesday and slightly trimmed its inflation forecasts as global trade frictions clouded the outlook, reinforcing views the central bank is in no rush to trim its massive stimulus programme.
But the BOJ issued a slightly stronger warning on financial vulnerabilities than it did three months ago, reflecting growing concerns that years of ultra-low rates were hurting bank profits and could discourage them from increasing lending.
"Prolonged downward pressure on financial institutions' profits from low interest rates... could destabilise the financial system," the BOJ said in a quarterly report assessing the long-term economic outlook and risks.
"Although these risks are judged as not significant at this point, it's necessary to pay close attention to future developments," it said. In the previous report in July, the BOJ only said such risks were not materialising.
As widely expected, the BOJ maintained a pledge to guide short-term interest rates at minus 0.1 percent and long-term rates around zero percent by a 7-2 vote.
In the quarterly report, the central bank cut its core consumer inflation forecast for the current fiscal year ending in March 2019 to 0.9 percent from 1.1 percent three months ago.
It also trimmed its fiscal 2019 inflation forecast to 1.4 percent from 1.5 percent, and the projection for the following year to 1.5 percent from 1.6 percent.
Inflation has remained well below the BOJ's 2 percent target despite Japan's steady economic expansion, forcing the central bank to maintain stimulus despite the impact on bank profits from years of near-zero interest rates.
The central bank took steps in July to make its policy framework more sustainable, such as allowing bond yields to move more flexibly around its target.
But the measures have done little to revive bond market trading or give relief to banks. In a semi-annual review of Japan's banking system, the BOJ warned that risk-taking in Japan's financial sector hit a near three-decade high as they struggle to earn profits.
Adding to headwinds for meeting the BOJ's price target, a recent batch of weak data suggests Japan's economy may have peaked. Many analysts warn that intensifying trade frictions and slowing Chinese demand could weigh on business sentiment and discourage firms from boosting spending.
Japanese factory output fell more than expected in September as a series of typhoons and earthquakes disrupted production, data released earlier on Wednesday showed, reinforcing expectations the economy may have contracted slightly in the third quarter.