TOKYO -- Japan's real estate lending appears to be overheating, the nation's central bank warned Wednesday in a report that depicts a credit landscape last seen in the economic bubble year of 1990.
The Bank of Japan's Financial System Report published Wednesday says much of the lending comes from the country's small regional banks, flush with funds stemming from monetary easing and in search for lending opportunities.
The report features a "heat map" of 14 financial activity indexes measured through the end of 2018. Just one index -- comparing the volume of real estate lending to the gross domestic product -- appears in red on the map, the color that signals overheating.
The lending-to-GDP ratio rated as red during the entire second half of 2018. The metric for the fourth quarter stood at 14.1%, above the 13.9% threshold triggering the alert. The index last went red during a full stretch between 1986 and 1990.
The BOJ estimates that outstanding domestic lending grew to 78.9 trillion yen ($705 billion) at the end of last year, marking an all-time high for the straight fourth year.
After remaining flat at roughly 60 trillion yen starting in 2007, outstanding real estate lending began climbing around 2013 -- the year newly installed BOJ Gov. Haruhiko Kuroda launched the unprecedented quantitative and qualitative easing policy. The expanded monetary base made its way to the real estate market through lenders that loosened their attitudes toward financing.
This activity especially grew for loans financing apartment buildings. These loans drew strong demand from individuals seeking inheritance tax shelters.
The BOJ does not think the real estate market itself is overheating because such indicators as land prices as a percentage of GOP are in the green zone, showing neither overheating nor stagnation.
"Financial and economic activities as a whole have shown no signs of overheating as observed during the bubble period in the late 1980s," the BOJ said.
But regional banks in areas with a shrinking populations and declining local economies could face more risks because there is more competition between lenders, lowering interest rate margins as they chase fewer borrowers. The BOJ projects that about 60% of these institutions could be suffering net losses by fiscal 2028 compared to around 1% today.