If the coronavirus or COVID-19 outbreak continues for a longer period then it may trigger a negative feedback loop and can threaten the worsening of the Japanese economy and destabilize the nation's financial system, the Bank of Japan warned on Tuesday.

Japan economy at risk due to COVID-19 pandemic

Bank of Japan announces negative interest rates
A man holding an umbrella walks in front of the Bank of Japan headquarters in Tokyo, Japan, January 29, 2016. The Bank of Japan ramped up its aggressive stimulus campaign on Friday, adding negative interest rates on central banks deposits to its massive asset-buying program, stunning financial markets that expected no action or a moderate increase in asset purchases. Reuters

The financial institutions of the country have increased the risky lending, which included lending to overseas energy firms for higher yields amidst years of ultra-low interest rates, the BOJ stated in a semi-annual report after analysing the banking system of Japan.

Such exposure to various risks is among factors the BOJ must take into account in scrutinizing Japan's financial system, the report said. "We expect Japan's financial system to remain sound but must be vigilant to developments," the central bank said.

(With agency inputs)