The central bank warns of early signs of overheating as the Nikkei hits a new high, closely monitoring risks from US policies.

The Bank of Japan said on Thursday that there are early signs of overheating in the domestic stock market and warned that the uncertainty of US trade policy could trigger a significant market correction, thereby impacting financial institutions. Following the parliamentary vote in support of fiscal stimulus policies, Sanae Takaichi became Japan's first female prime minister. On Tuesday, the Nikkei 225 index closed at a historic high. So far this year, the index has surged nearly 24%. In its semi-annual report on the domestic financial system, the Bank of Japan pointed out that foreign hedge funds are increasing leverage in Japanese government bond (JGB) trades, and their increased participation may further amplify market volatility. The report stated, "If there is an unexpected change in the market environment, rapid position adjustments by hedge funds during deleveraging could exacerbate asset price volatility. If such adjustments occur in the JGB market, it could affect the performance of various financial instruments in Japan." From April to May this year, hedge funds sold Japanese government bonds due to rumors of a large-scale fiscal spending plan (which could increase bond issuance), causing long-term JGB yields to soar. Although yields have since stabilized, some analysts warn that Sanae Takaichi's proposed large-scale spending plan could trigger a new round of bond selling and lead to yen depreciation. The financial system report's "heatmap" (visualizing the degree of financial imbalances in various asset prices and credit conditions, with "red" representing overheating) showed that stock prices were marked as "red"; the other 13 categories were all "green," indicating no significant deviations from trends. The report emphasized, "Given the market risks faced by Japanese banks holding stocks, asset price trends including stock prices should be closely monitored." The report also mentioned that real estate prices are on the rise, especially in core urban areas, partly due to increased investment demand from foreign investors. "If market participants' expectations for future real estate demand change, it could trigger a real estate price correction," the report stated, "Given that banks' real estate-related exposures continue to rise, the real estate market trends still need to be closely watched." However, the Bank of Japan also stated in the report that Japan's financial system as a whole remains stable. Banks have sufficient capital bases and stable funding capabilities to withstand various risks. The Bank of Japan continues to monitor signs of financial imbalances that could trigger a financial crisis, such as asset price bubbles and excessive credit expansion. While economic and price trends are the main factors determining monetary policy, the central bank also considers observations related to financial imbalances in formulating policies. Critics believe that the Bank of Japan's long-standing ultra-low interest rate policy and weak yen (which lowers the cost of foreign investment in Japan) are key reasons for the surge in asset and real estate prices. Data from the Real Estate Economic Institute shows that from April to September this year, the average price of newly built apartments in the Tokyo metropolitan area rose by 20.4% year-on-year. The Bank of Japan exited its decade-long aggressive stimulus plan last year and raised short-term interest rates to 0.5% in January this year, as it believed that Japan is close to achieving its 2% inflation target and can maintain this level. However, Bank of Japan Governor Kazuo Ueda emphasized that given the uncertainty of the impact of US tariffs on the Japanese economy, caution should be exercised in future rate hikes. An earlier market survey this month showed that most economists expect the Bank of Japan to raise rates again in the fourth quarter, possibly as early as next week.