Financial System Report Summary · Cases from regional banks (lhs) Cases from banks and credit cooperatives (lhs) Total amount outstanding (rhs) number of cases, thou. bil. yen FY

October 2015

Bank of Japan

ysteminancial

eport

Summary

1

Features of this Financial System Report1: Assessment of developments

(Comprehensive assessment)

"Japan's financial system has been maintaining stability. Financial intermediation has operated more smoothly than before."

(Major developments since the previous Report)

Risks observed in financial markets (Chapter 3)

・ From summer 2015, volatility rose in global financial markets amid growing concern about a slowdown in emerging economies, including Asia.

・ Attention should be paid as to whether the heightening of market participants’ concern over the development of the world economy will affect the risk appetite of global investors and global capital flows.

Functioning of the financial system (Chapter 4)

・Financial institutions (FIs: banks and shinkin banks) took more risks in:

-- lending at home and abroad (M&A, real estate etc.);

-- market exposures (investment trusts etc.)

・Households and institutional investors gradually shifted from safe assets to risky assets.

・Financing conditions among firms and households became more accommodative:

-- their funding costs exhibited a downward trend;

-- lending attitudes of FIs to them became more accommodative;

-- firms’ financial positions improved.

Stability of the financial system (Chapter 5 and 6):

(1) Macro risk profiles and financial bases of FIs

・Credit risk: increased somewhat (has been subdued).

・Market risk: largely unchanged (recently increased).

vs.

・Capital: increased.

・The stability gap of foreign-currency funding: started to narrow.

→ A fine balance has continued to be kept between FIs' macro risks and their financial bases.

(2) Macro risk indicators

・ Signals from the heat map are unchanged: the real estate firm investment to GDP ratio in "red"; the other 13 indicators in "green".

・ A comprehensive look at a wide spectrum of information suggests that the real estate market currently shows no signs of overheating on the whole.

→ Signs of financial imbalances such as indications of overheating or excessively bullish expectations have not been observed.

(3) Macro stress testing: two scenarios

(Tail event) FIs' capital adequacy ratios would be maintained above regulatory levels on average, even if economic conditions would deteriorate to a level comparable to the Lehman shock.

(Tailored event) The risk that a slowdown in Asian economies would threaten the stability is considered to be limited.

→ Japan’s financial system generally has strong resilience against various stresses.

Features of this Financial System Report1: Assessment of developments

2

Features of this Financial System Report2: Challenges in ensuring financial stability

・ FIs' macro risks have generally been restrained, largely attributable to the benign financial conditions.

・ The slowdown in emerging economies and the rise in volatility in global financial markets since summer 2015 may affect Japan's FIs, in case of a further worsening of the market conditions.

→ FIs need to strengthen their ability to respond to risks in areas in which they are actively enhancing their risk-taking stance. The two key areas are:

(1) overseas operations;-- manage credit and foreign currency funding risks

(2) market investment.-- understand the profile of complicated risks and manage those risks

・ Moreover, two structural issues discussed in previous Reports have been unchanged.

(3) the increased systemic importance of large FIs

(4) the decline in core profitability among regional FIs

→ The Bank will continue to tackle these issues particularly through its off-site monitoring and on-site examinations.

-- Policies are set out in Chapter VII of the April 2015 Report.

3

Global financial markets showed signs of nervousness after the summer, such as stockprices edging down with volatility due to growing concerns over prospects for theemerging economies.

Attention should be paid as to whether the heightening of market participants'concern over the development of the world economy, particularly for the emergingeconomies, as well as the impact of the monetary policy of advanced economies onglobal financial markets, will affect the risk appetite of global investors and globalcapital flows.

MFIVs of government bond prices

Chart III-1-1: Volatility in global financial markets

MFIVs of stock prices

MFIVs of U.S. dollar/yen and euro/yen rates IVs of commodity prices

Sources: Bloomberg; BOJ.

4

0

2

4

6

8

10

12

11 12 13 14 15CY 2011

%

Japan

UnitedStates

Germany

0

20

40

60

80

11 12 13 14 15

%

Nikkei VI

VIX

VSTOXX

CY 2011

0

5

10

15

20

25

30

11 12 13 14 15

%

U.S. dollar/yenEuro/yen

CY 20110

20

40

60

80

11 12 13 14 15

%

WTI crude oilCommodity index

CY 2011

III. Risks observed in financial markets 1. Global financial markets (1)

In the emerging markets, the rate of decline for currencies and stock pricesaccelerated and credit spreads widened.

In the advanced markets, stock prices also declined and credit spreads on corporatebonds, especially for high‐yield bonds widened as well.

Chart III-1-2: Developments in emerging markets

Chart III-1-3: Developments in advanced markets

Stock prices and currencies Spreads between emerging market bonds and U.S. Treasuries

Source: Bloomberg.

Spreads between high-yield bonds and government bondsStock prices

Source: Bloomberg.

5

60

80

100

120

140

600

800

1,000

1,200

1,400

11 12 13 14 15

ptspts

CY 2011

Stock prices (lhs)

Currencies (rhs)

0

100

200

300

400

500

600

700

11 12 13 14 15

bps

CY 2011

Corporate bondsGovernment bonds

0

200

400

600

800

1,000

1,200

11 12 13 14 15

bps

CY 2011

United StatesEurope

80

90

100

110

120

130

140

14/1 14/4 14/7 14/10 15/1 15/4 15/7

JapanUnited StatesEurope

Jan. Apr. July Oct. Jan. Apr. July 2014 15

beginning of CY 2014=100

III. Risks observed in financial markets 1. Global financial markets (2)

Long‐term JGB yields rose somewhat toward the summer, and declined thereafter.

The volatility of government bond prices remained at a slightly high level toward thesummer and declined moderately thereafter.

Credit spreads on corporate bonds continued to be at low levels as a whole, althoughspreads on some issues have remained at a high level due to idiosyncratic factors.

The market assessment of firms' creditworthiness has improved.

Chart III-2-1: Long-term JGB yields Chart III-2-2: Changes in the JGB yield curve

Chart III-2-12: Yield spreads between corporate bonds and JGBs

Chart III-2-13: Developments in long-term credit ratings

Source: Bloomberg.

Source: Bloomberg.Source: Japan Securities Dealers Association.

6

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

11 12 13 14 15

%Introductionof QQE

CY 2011

Expansionof QQE

Ap My Je Jl Ag S2015

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1 2 3 4 5 6 7 8 9 10 15 20 30

Mar. 31, 2015Jul. 2, 2015Sep. 30, 2015

%

years

Source: Bloomberg.

0

1

2

3

4

5

6

06 07 08 09 10 11 12 13 14 15

%

AA

A

BBB

CY 2006-30

-20

-10

0

10

20

30

11 12 13 14 15

number

CY 2011

Upgrades

Downgrades

III. Risks observed in financial markets 2. Japanese financial markets (1)

Japanese stock prices followed a moderate rising trend toward the summer anddeclined rather substantially thereafter. Volatility in the stock market has risen sincethe summer. Risk reversals show that market participants temporarily showed a rapidincrease in vigilance against the risk of declining stock prices.

The yen depreciated moderately against the U.S. dollar toward the summer, butrecently the yen has appreciated somewhat. The volatility of the yen's exchange rateshas been rising somewhat since summer. Looking at risk reversals, a slight concernover appreciation of the yen against the dollar has been observed after the summer.

Chart III-2-16: Stock prices (TOPIX) Chart III-2-17: Risk reversals of stock prices

Chart III-2-21: Foreign exchange rates Chart III-2-22: Risk reversals of U.S. dollar/yen and euro/yen rates

Source: Bloomberg. Sources: Bloomberg; BOJ.

Source: Bloomberg. Source: Bloomberg.

7

600

800

1,000

1,200

1,400

1,600

1,800

11 12 13 14 15CY 2011

pts

Ap2015

My Je Jl Ag S-25

-20

-15

-10

-5

0

09 10 11 12 13 14 15

%

Japan

United StatesEurope

CY 2009

Perception ofthe decline in stock prices

60

80

100

120

140

160

180

11 12 13 14 15

yen

CY 2011

U.S. dollar/yenEuro/yen

Ap My Je Jl Ag S 2015

III. Risks observed in financial markets2. Japanese financial markets (2)

The growth rate of FIs' domestic loans outstanding has been largely unchanged fromthe level observed at the time of the previous Report.

Loan growth among FIs has been led by loans to firms. The increase in the outstandingamount of lending has been spreading across small firms and among various industriesand regions.

Chart IV-1-1: Domestic loans outstanding among financial institutions

Chart IV-1-7: Loans outstanding among financial institutions by type of borrower

Regarding real estate loans, the increase in loans by major banks is mainly attributableto the increase in loans to large real estate developers and to J‐REITs (statisticallydefined as small and medium‐sized firms).

Among regional FIs, loans to small firms in the housing rental business, i.e., assetmanagement companies founded by individuals and local real estate companies, havebeen growing at a faster pace.

Chart IV-1-13: Real estate loans by type of bank

Major banks Regional banks

8

-3

-2

-1

0

1

2

3

10 11 12 13 14 15

Financial institutions

Financial institutions(before adjusting forspecial items)

y/y % chg.

CY20-6

-4

-2

0

2

4

6

05 06 07 08 09 10 11 12 13 14 15

Large firms, etc. Small firmsLocal governments IndividualsTotal

y/y % chg.

CY 20

-6-5-4-3-2-1012345

FY2010 11 12 13 14 15House and room leasing business by individuals Small and medium-sized firmsLarge firms Special purpose companies for real estateReal estate-related local public corporations Real estate loans

y/y % chg.

-3-2-1012345678

FY2010 11 12 13 14 15

y/y % chg.

IV. Examination of financial intermediation 1. Domestic loans (1)

FIs have been steadily proceeding with efforts toward increasing industrial vitality, asmajor banks have been providing support for the business reconstruction of largefirms, and FIs including regional institutions have been taking part in the improvementof business management among small firms and the fostering of growing businesses.

Loans by FIs utilizing the Bank of Japan's Stimulating Bank Lending Facility have alsobeen increasing.

Chart IV-1-15: Loans for start-ups and new projects

Chart IV-1-16: Number of completed business revitalization support projects by small and medium enterprise revitalization support councils

Chart IV-1-17: BOJ's loan support program Chart IV-1-18: BOJ's loan disbursements under the fund-provisioning measure to support strengthening the foundations for economic growth by area

Sources: Community Bank Shinyo Kumiai; Financial Services Agency; National Association of Shinkin Banks; Regional Banks Association of Japan; Second Association of Regional Banks.

Source: Small and Medium Enterprise Agency.

Fund-provisioning measure to stimulate bank

lending

9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2003 04 05 06 07 08 09 10 11 12 13 14

number of cases, thou.

FY

0

50

100

150

200

250

300

0

4

8

12

16

20

2003 05 07 09 11 13

Cases from regional banks (lhs)Cases from banks and credit cooperatives (lhs)Total amount outstanding (rhs)

number of cases, thou. bil. yen

FY

shinkin

Fund-provisioning measure to support strengthening the

foundations for economic growth

0

5

10

15

20

25

June2013

Dec. June14

Dec. June15

Regional financialinstitutions, etc.Major banks

tril. yen

0

1

2

3

4

5

June2013

Dec. June14

Dec. June15

tril. yen

Total10,764.8

Environment and energy

2,988.8(27.8%)

Medical andnursing care

Development of social infrastructure 1,011.6 (9.4%)

Investment and business deployment in Asia 965.2 (9.0%)

Business reorganization623.1 (5.8%)

Others412.1 (3.8%)

Other areas1,949.4(18.1%)

Regional and urban revitalization528.2 (4.9%)

Research and development578.5 (5.4%)

1,707.9 (15.9%)

bil. yen

IV. Examination of financial intermediation 1. Domestic loans (2)

Banks' overseas loans have continued to show relatively high growth.

By region, those to Europe have remained relatively weak and the pace of growth inloans to Asia, which had been high, has slowed due to the deceleration of localeconomies.

Chart IV-1-21: Banks' foreign currency-denominated loans and loans of overseas branches

Loan amounts outstanding (U.S. dollar basis and yen basis)


Chart IV-1-22: Overseas loans outstanding of three major banks by region

Sources: Published accounts of each bank.

10

10 11 12 13 14 150

10

20

30

40

50

60

70

80

90

0

100

200

300

400

500

600

700

800

900Foreign currency-denominated impact loans (lhs)Loans of overseas branches (lhs)

bil. U.S. dollars

CY2010

tril. yen

Outstanding of foreign currency-denominated impact loans and loans of overseas branches (yen basis, rhs)

10 11 12 13 14 150.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

5

10

15

20

25

30bil. U.S. dollars

CY

tril. yen

CY2010

0.0

0.1

0.2

0.3

0.4

0.5

0.6

2010 11 12 13 14

Others Latin AmericaWestern Europe North AmericaAsia

tril. U.S. dollars

FY

IV. Examination of financial intermediation 2. Overseas loans (1)

Banks have maintained their strong interest in expanding overseas lending to supportthe global expansion of Japanese firms and to capture the financial needs in countrieswith high growth potential.

In Asia, although the pace of growth in lending has slowed, banks have also worked toexpand their overseas network and bolster their local supply of financial services byacquiring and investing in foreign banks and other FIs.

Chart IV-1-25: Recent major overseas acquisitions and opening of new branches by major banks

Sources: Disclosures of each bank.

11

Time ofannouncement

Country Outline

Feb. 2015 United States Acquisit ion of North American Asset Portfolio from RBS

July 2015 Austria Opening of Vienna Branch

Aug. 2015 Myanmar Opening of Yangon Branch

Feb. 2014 United States Integration of BTMU's U.S. branch banking operations with Union Bank

Apr. 2014 India Opening of Bangalore Branch

June 2014 China Opening of Suzhou Branch

Jan. 2015 Thailand Integration of Bangkok Branch with Bank of Ayudhya

Apr. 2015 Myanmar Opening of Yangon Branch

June 2015 Canada Opening of Calgary Branch

July 2015 China Approval for Opening a Branch in Fuzhou

July 2015 Dubai Approval for Commence an Islamic Finance Business at Dubai Branch

Jan. 2014 Ireland Opening of Dublin Branch

Mar. 2014 Indonesia Additional Share Purchase of PT Bank Tabungan Pensiunan Nasional Tbk (BTPN)

June 2014 Czech Opening of Prague Branch

Aug. 2014 Cambodia Share Purchase of ACLEDA Bank

Dec. 2014 Spain Opening of Madrid Branch

Mar. 2015 Hong Kong Additional Share Purchase of the Bank of East Asia

Mar. 2015 Mexico Establishment of SMBC SOFOM (Finance Company)

Apr. 2015 Colombia Share Purchase of Financiera de Desarrollo Nacional S.A.

Apr. 2015 Myanmar Opening of Yangon Branch

June 2015 Europe Acquisit ion of European Asset Portfolio from General Electric Group in United States

July 2015 China Approval for Opening a Branch in Dalian

Aug. 2015 Cambodia Additional Share Purchase of ACLEDA Bank

Sep. 2015 Philippines Opening of Manila Branch

Dec. 2014 India Share Purchase of Reliance Capital

Sep. 2015 Thailand Establishment of a Bank Subsidiary in Thailand

The Bank ofTokyo-

Mitsubishi UFJ

SumitomoMitsui

BankingCorporation

Mizuho Bank

SumitomoMitsui T rust

Bank

IV. Examination of financial intermediation 2. Overseas loans (2)

The narrowing trend in FIs' interest rate spreads on domestic loans has continued.

Pressure exerted by the supply of funds remains stronger than that exerted bydemand.

The profitability of housing loans continues to decline.

The pace of decline in lending spreads has exceeded that in credit costs.

Chart IV-1-19: Interest margin on loans in the domestic business sector by type of bank


Chart V-1-13: Preferential rates on housing loans Chart V-1-14: Credit cost ratio of housing loans

Sources: Japan Financial News, "Nikkin report"; BOJ

Floating interest rates 10-year fixed interest rates

12

1.17 1.081.02

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

05 06 07 08 09 10 11 12 13 14

Interest rate on interest-bearing liabilitiesInterest rate on loansInterest margin on loans

%

FY2004

1.561.46

1.37

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

05 06 07 08 09 10 11 12 13 14

%

FY2004

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

2010 11 12 13 14

10th-90th percentile range25th-75th percentile rangeMedian

%

FY2004 06 08 10 12 14-1

0

1

2

3 Funding costs, etc.Preferential ratesInterest margin

%

FY 2004 06 08 10 12 14

IV. Examination of financial intermediation3. Interest rate spreads on loans

FIs have gradually been enhancing their risk‐taking stance by investing to risky assetsfurther, such as investment trusts, while maintaining a high level of yen‐denominatedbond investment.

The outstanding amount of yen‐denominated bonds ‐‐ including JGBs, municipalbonds, and corporate bonds ‐‐ is at a high level from a longer‐term perspective,although it has been on a declining trend, particularly at major banks.

The outstanding amount of foreign bonds, when converted into yen, has been more orless unchanged, albeit with fluctuations.

Chart IV-1-28: Outstanding amount of yen-denominated bonds among financial institutions

Chart IV-1-30: Outstanding amount of foreign bonds among financial institutions

13

Apr.2013

Apr.14

Apr.15

Domestic currency-denominated foreignbondsForeign currency-denominated foreignbonds

0

5

10

15

20

25

30

35

40

45

50

55

1982 87 92 97 2002 07 12

Foreign bonds

Monthlytril. yen

FY

0

50

100

150

200

250

1982 87 92 97 2002 07

Other domestic bonds

JGBs

tril. yen

FY Apr.2012

Apr.13

Apr.14

Apr.15

Monthly

IV. Examination of financial intermediation 4. Securities investment (1)

Investment trusts and other assets have continued to increase.

Banks continue to further engage themselves in risk taking through investment invarious financial assets, for example, stock investment trusts, real estate investmenttrusts (REITs), and bond ladder funds both at home and abroad.

FIs' stockholdings are on a quite moderate downward trend, as they continue toreduce their strategic stockholdings.

As the Corporate Governance Code came into effect in June 2015, major FIs disclosedtheir guidelines on strategic stockholdings. These efforts are expected to play a role inimproving the soundness of FIs.

Chart IV-1-31: Outstanding amount of investment trusts, etc. among financial institutions

Chart IV-1-33: Policy regarding strategic stockholdings published by financial institutions

Sources: Published accounts of each group.

14

0

2

4

6

8

10

12

14

00/12 03/12 06/12 09/12 12/12

Investment trusts, etc.

tril. yen

Dec.03

Dec.06

Dec.09

Dec.12

Dec.2000

IV. Examination of financial intermediation 4. Securities investment (2)

Time ofannouncement

Outline

MHFG June 2015"As a basic policy, unless we consider these holdings to be meaningful, Mizuho Financial Group,Inc. and our core subsidiaries will not hold the shares of other companies as cross-shareholdings."

MUFG July 2015"MUFG has adopted a basic policy that its Group banks…shall reduce the amount of shares heldfor the purpose of strategic investment, following sufficient consultation with the relevantcorporate business clients."

SMFG July 2015"In principle, SMFG does not hold the shares of other listed companies where 'the rationale' tohold those shares cannot be recognised."

Majorfinancial

institutions

FIs have continued to expand their balance sheets and increase risky assets other thanJGBs.

Chart IV-1-34: Assets outstanding among financial institutions

Chart IV-1-36: Changes in assets and liabilities among financial institutions

15

0

200

400

600

800

1,000

1,200

82 86 90 94 98 02 06 10 14

tril. yen

FY 1982 2002

900

950

1,000

1,050

1,100

1,150

1,200

Tot

al a

sset

s (D

ec. 2

012)

JGB

s

Dom

estic

loan

s

Ove

rsea

s lo

ans

Secu

ritie

s (e

xclu

ding

JG

Bs)

Oth

er a

sset

s

Cas

h an

d de

posi

ts

Tot

al a

sset

s (A

ug. 2

015)

Tot

al li

abili

ties

(Aug

. 201

5)

Dom

esti

c de

posi

ts a

nd N

CD

s

Oth

er li

abil

ities

Tot

al li

abili

ties

(Dec

. 201

2)

tril. yen

+76 tril. yen

-47 tril.yen

+148 tril. yen

IV. Examination of financial intermediation5. Financial institutions' balance sheet

Major institutional investors such as life insurance companies and pension funds,having invested mainly in domestic long‐term bonds, have continued to increase theirshare of investment in risky assets.

Chart IV-2-1: Asset investments among life insurance companies

Chart IV-3-1: Equity financing

Equity financing through the stock market remains at a high level.

Issuing conditions for CP and corporate bonds have continued to be favorable.

Chart IV-3-6: Amount of corporate bonds issued

Chart IV-2-3: Outward investment among life insurance companies and pension funds, etc. (medium- and long-term bonds)

Source: I-N Information Systems.

Number of cases Amount

Source: I-N Information Systems.

16

2005 06 07 08 09 10 11 12 13 14 15-10

-5

0

5

10

15

20 OthersDomestic securities excluding sharesShares and other equitiesLoansOverseas assetsTotal

y/y chg., tril. yen

CY-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Jan.2013

July Jan.14

July Jan.15

July

Life insurance companies

Pension funds, etc.

tril. yen

Net purchase

Net sale

(trust accounts of banks)

Source: Ministry of Finance.

0

20

40

60

80

100

11 12 13 14 15

IPO

CB

PO

number of cases

CY20110.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

11 12 13 14 15

tril. yen

CY20110.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

11 12 13 14 15

Samurai bonds

Straight bonds

CY 2011

tril. yen

IV. Examination of financial intermediation6. Institutional investors and financial markets

Financial conditions among firms and households have become more accommodative.

Chart IV-4-1: DI of lending attitudes of financial institutions as perceived by firms

Chart IV-4-3: Total outstanding amount of firm funding

Chart IV-4-2: DI of financial positions of firms

Sources: I-N Information Systems; Japan Securities Dealers Association; Japan Securities Depository Center; BOJ, "Flow of funds accounts," "Loans and bills discounted by sector."

17

-40

-30

-20

-10

0

10

20

30

40

50

1984 88 92 96 2000 04 08 12

Large firmsMedium-sized firmsSmall firms

% pts

CY

Accommodative

Severe

-30-25-20-15-10-505

101520253035

1984 88 92 96 2000 04 08 12

Large firmsMedium-sized firmsSmall firms

% pts

CY

Easy

Tight

-4

-3

-2

-1

0

1

2

3

05 06 07 08 09 10 11 12 13 14 15

Equity financeCorporate bondsCPBorrowing from financial institutionsTotal

y/y % chg.

CY20

IV. Examination of financial intermediation7. Financial conditions among firms and households

Deposits have been central to household financial assets.

However, the share of risky assets in household financial assets has been increasing, asseen in the continued net inflow to investment trusts.

Chart IV-4-5: Client assets held by major securities companies for retail customers

Chart IV-4-9: Purchases through NISA accounts and the number of NISA accounts opened

Chart IV-4-10: Assets under management in wrap accounts

Source: Japan Investment Advisers Association.

18

0

20

40

60

80

100

120

140

160

Mar.2011

Sep. Mar.12

Sep. Mar.13

Sep. Mar.14

Sep. Mar.15

Others MRFBondholdings Investment trustsEquities

tril. yen

3.0

3.5

4.0

4.5

5.0

5.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mar.2014

June Sep. Dec. Mar.2015

June

Amount (lhs)Number of accounts opened (rhs)

tril. yen number of accounts, mil.

0

50

100

150

200

250

300

350

400

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Mar.2006

Mar.08

Mar.10

Mar.12

Mar.14

Outstanding amount (lhs)

Number of accounts (rhs)

tril. yen number of accounts, thou.

IV. Examination of financial intermediation8. Households’ investment activities

Chart IV-4-4: Risky assets held by households

0

2

4

6

8

10

12

14

16

0

50

100

150

200

250

1989 2000 02 04 06 08 10 12 14Equities (lhs)Investment trusts (lhs)

Ratio to total financial assets (rhs)

tril. yen

Foreign currency deposits and outward investments in securities (lhs)

%

FY

FIs' credit risk has increased somewhat from that in the previous Report (the firstincrease in 9 half‐year periods, since the first half of 2010).

Regional banks and shinkin banks have continued the trend, characterized by a declinein the amount of credit risk amid an increase in loans outstanding.

The upturn at major banks reflects the fact that the effects of the increase in domesticand overseas lending and of an increase in the amount of expected losses exceededthe effects of restraining risks attributable to the improvements in the quality of loans.

Chart V-1-1: Credit risk among financial institutions

Chart V-1-5: Composition of claims by borrower classification

Chart V-1-6: NPL ratios

Chart V-1-2: Credit risk by type of bank

Major banks Regional banks Shinkin banks


19

0

10

20

30

40

50

60

0

2

4

6

8

10

12

14

16

18

20

2005 06 07 08 09 10 11 12 13 Ap-S14

O-Mr15

Credit risk (lhs)

Ratio to adequate capital (rhs)

tril. yen

FY

%

Semiannually

Ap-S O-Mr14 15

0

1

2

3

4

5

6

7

8

9

10

05 07 09 11 13 14

Credit risk (lhs) Ratio to adequate capital (rhs)

tril. yen

FY 20

Semi-annually

05 07 09 11 13 14

Semiannually

20

0

10

20

30

40

50

60

05 07 09 11 13

%

20

65

70

75

80

85

90

95

100

1998 2003 08 13"In danger of bankruptcy" and below"Special attention""Need attention" or "need attention excluding special attention""Normal"

%

FY 1998 2003 08 13 1998 2003 08 130

2

4

6

8

10

12

2000 02 04 06 08 10 12 14

Major banksRegional banks banks

%

FY

Shinkin

V. Macro risk profiles and financial bases of financial institutions1. Credit risk (1)

The credit cost ratio of FIs is at an extremely low level.

Chart V-1-8: Credit cost ratio of banks

Chart V-1-10: Loan-loss provision ratios by type of bank

The loan‐loss provision ratios ‐‐ already at their lowest level from a longer‐termperspective ‐‐ declined further.

Chart V-1-9: Credit cost ratio by type of bank

20

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1982 86 90 94 98 2002 06 10 14

%

FY

Average from FY 1982 to FY 2014 (0.7%)




-0.5

0.0

0.5

1.0

2005 06 07 08 09 10 11 12 13 14

Major banksRegional banks banksShinkin

%

FY

0.0

0.5

1.0

1.5

2.0

2.5

2004 05 06 07 08 09 10 11 12 13 14

Major banksRegional banks banks

%

FY

Shinkin


The situation surrounding the macro credit risk

(1) The credit cost of FIs is at an extremely low level from a long‐term perspective,brought about by an improvement in the quality of loans.

(2) Loan‐loss provision ratios continue to decline in a situation where FIs have easedtheir lending stances with regard to both domestic and overseas lending.

(3) Lending spreads on loans have also continued to decline.

However, there have been some signs suggesting the possibility that the subduedtrend in credit costs will change in the future.

(1) The amount of credit risk has turned to an increase for the first time in 4 and ahalf years, particularly among major banks.

(2) The reversal of loan‐loss provisions, which has depressed credit costs over thepast few years, has more or less halted.

(3) The pace of growth in Asian economies has been slowing, and market concernover a further slowdown has been strengthening. At present, thesedevelopments have not affected actual credit costs. However, depending onfuture developments, it is possible that these developments will eventuallyaffect business conditions for some areas that FIs have been actively promoting,such as overseas loans, mergers and acquisitions, and loans related to resourcedevelopment.

Taking into account the above, the following three points are the key tasks andchallenges regarding credit risk management of FIs.

(1) It is necessary for FIs to improve their credit management capabilities in areaswhere active engagement in credit extension has been observed (overseas loans,M&A‐related loans, resource development‐related loans, the housing rentalbusiness , etc.).

(2) It is necessary to continuously examine the adequacy of how the amount ofcredit risk is estimated and provisions are calculated, taking into accountexpectations for future developments.

(3) It is necessary to make appropriate assessments of risk and return in loans.

21


Box 1: Overseas M&A‐related loans by major banks and credit management

As Japanese businesses have become increasingly active in mergers and acquisitions(M&As), M&A‐related loans have represented a substantial part of the recentincrease in lending by Japan's major banks.

In general, (1) M&A‐related loans require examination for credit extension in arelatively short period of time. Also, (2) risk characteristics are complex due to, forexample, the differences in business practices and legal frameworks, and effects offoreign exchange. In addition, (3) the number of large‐scale M&A deals ‐‐ includingthe case in which transaction values far excess the EBITDA for the term, or theamounts posted as goodwill in acquisition accounting are fairly large relative to thefirm’s net assets ‐‐ are increasing recently.

Taking into account the above, the following should be implemented in dealing withM&A‐related loans: (1) examination and development of a framework for the riskassessment of overseas business; (2) enhancement of stress testing, whichincorporates trends and developments in foreign exchange and overseas economies;and (3) reinforcement of the monitoring of developments in post‐merger integration.

Chart IV-1-8: M&A among Japanese companies Chart B1-1: Distribution of transaction values / EBITDA ratio of overseas M&A deals made by Japanese corporations

Source: RECOF. Source: Bloomberg.

22

0

10

20

30

40

50

60

70

Lessthan 5

5-10 10-20 20-30 30 or more

CY 2012CY 2013CY 2014CY 2015

%

Transaction values / EBITDA, times

0

1

2

3

4

5

6

2011 12 13 14 15

tril. yen

0

150

300

450

600

750

2011 12 13 14 15

In-out In-inOut-in

number of cases

CY


Box 2: Loans and credit management for the housing rental business

In recent years, loans for the housing rental business have increased, particularly amongregional FIs. This reflects the growing needs for more effective asset management, or fromtax saving by land owners or high net‐worth individuals.

Although some studies suggest that the rental housing starts reflect the developments invacancy rates or the number of households, the maturity of loans usually exceeds 10 years,or even in some cases 20 years. In fact, demand‐and‐supply conditions over a long horizonimply that at the prefecture level the correlation between the present level of rentalhousing starts and the forecast for the future number of households is not necessarily veryhigh.

Given the long maturities and other characteristics peculiar to this sector, both initialscreening and interim management during the life of the loan are essential for themanagement of credit risks of the housing rental business.

Chart B2-3: Relationship between rental housing starts and vacancy rates

Chart B2-4: Relationship between rental housing starts and households

Sources: Ministry of Infrastructure, Transport and Tourism, "Statistics on building construction starts"; Ministry of Internal Affairs and Communications, "Housing and land survey."

Sources: Ministry of Infrastructure, Transport and Tourism, "Statistics on building construction starts"; National Institute of Population and Social Security Research, "Household projection for Japan."

23

y = -0.98x + 22.41R² = 0.32

-20

-15

-10

-5

0

5

10

15

20

25

30

10 15 20 25 30vacancy rates by prefecture, %

average growth rates of rental housing starts by prefecture, %

y = 0.17x + 0.30 (17.43) (7.54)

R² = 0.92

y = 0.07x + 0.93(0.84) (2.69)R² = 0.09

0

1

2

3

4

5

6

7

-30 -20 -10 0 10 20 30

From CY 2010 toCY 2015From CY 2015 toCY 2030

rental housing starts by prefecture, 10 thousands

changes in household by prefecture, 10 thousands

(Projections)


Box 3: Changes in loan portfolios and sophistication of credit risk analysis

Size of individual loans among major banks has grown moderately over the last few years.

The "internal ratings‐based approach," which is used by many FIs, leaves out theconcentration risks resulting from the increasingly large size of loans. In fact, the divergencebetween the amount of credit risks measured by taking into account the factors in thegrowing size of loans and those obtained by the "internal ratings‐based approach" has beengrowing gradually, suggesting the importance of appropriately capturing the concentrationrisks.

In assessing credit risk, it would be beneficial to utilize stress testing in addition to VaRanalysis especially in areas where the data accumulation is limited or when estimatinglosses to be incurred by risk scenarios that have not materialized.

Chart V-1-15: Cumulative share of credit amount Chart B3-1: Credit risk for large borrowers

24

0

5

10

15

20

25

30

0 200 400 600 800 1,000

FY2014

FY2008

number of counterparties

%

0

2

4

6

8

10

12

14

16

18

20

2008 09 10 11 12 13 14

%

FY


Deviation rate between the internal ratings-based

approach and simulation results

The amount of interest rate risk on yen‐denominated bonds held by FIs has decreasedsomewhat from the level observed in the previous Report.

-- Down by 4.2 percent, from 7.5 trillion yen at the end of December 2014 to 7.2trillion yen at the end of August 2015.

It remains at a relatively high level from a long‐term perspective.

Chart V-2-1: Interest rate risk associated with yen-denominated bondholdings among financial institutions

Chart V-2-2: Effects of a rise in interest rates on capital losses on yen-denominated bondholdings

Upward shift by 1 percentage point

25

0

5

10

15

20

25

30

0

1

2

3

4

5

6

7

8

9

10

2001 03 05 07 09 11 13

Less than 3 years (lhs) 3-5 years (lhs)

5-10 years (lhs) Over 10 years (lhs)

Ratio to adequate capital

tril. yen %

Quarterly

FY

(rhs)

Je D Je Jl 14 15

tril. yen

End-Dec. 2014 End-Mar. 2015 End-June 2015 End-Dec. 2014 End-Mar. 2015 End-June 2015

-7.5 -7.4 -7.2 -4.8 -4.7 -4.7

-5.5 -5.4 -5.1 -3.3 -3.2 -3.1

-2.7 -2.6 -2.3 -1.6 -1.5 -1.3

-2.8 -2.8 -2.8 -1.8 -1.8 -1.8

-2.0 -2.0 -2.1 -1.5 -1.5 -1.6

Parallel shift scenario Steepening scenario


Banks

Major banks

Regional banks

Shinkin banks

V. Macro risk profiles and financial bases of financial institutions2. Market risk (1)

Heterogeneity in the risk‐taking stance of individual FIs has increased, in a situationwhere the overall amount of risk remains at a high level.

Chart IV-1-29: Developments in yen-denominated bond investment by regional financial institutions

Chart V-2-4: Interest rate risk associated with yen-denominated bondholdings by type of bank


Figures for those increasing interest rate risk Figures for those reducing interest rate riskRegional banks

Shinkin banks

26

0

5

10

15

20

25

30

0

1

2

3

4

09 11 13

Less than 3 years (lhs) 3-5 years (lhs) 5-10 years (lhs)

Over 10 years (lhs) Ratio to adequate capital

tril. yen

Quarterly

Je D Je Jl14 15

FY2009

(rhs)

%

0

5

10

15

20

25

30

0

1

2

3

4

09 11 13

Quarterly

FY2009 Je D Je Jl14 15

tril. yen %

0

5

10

15

20

25

30

0

1

2

3

4

09 11 13

%Quarterly

FY2009 Je D Je Jl14 15

tril. yen

0.0

0.5

1.0

1.5

0

10

20

30

Apr.2008

Apr.09

Apr.10

Apr.11

Apr.12

Apr.13

Apr.14

Apr.15

Domestic bonds (lhs)Interest rate risk (rhs)

＋16.4%

tril. yen tril. yen

0.0

0.5

1.0

1.5

2.0

2.5

0

10

20

30

40

50

60

Apr.2008

Apr.09

Apr.10

Apr.11

Apr.12

Apr.13

Apr.14

Apr.15

-24.0%

tril. yen tril. yen

0.0

0.3

0.6

0.9

1.2

1.5

1.8

0

5

10

15

20

25

30

Apr.2008

Apr.09

Apr.10

Apr.11

Apr.12

Apr.13

Apr.14

Apr.15

＋32.6%

tril. yen tril. yen

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0

2

4

6

8

10

Apr.2008

Apr.09

Apr.10

Apr.11

Apr.12

Apr.13

Apr.14

Apr.15

-19.3%

tril. yen tril. yen


2

3

4

5

6

7

8

Mar.2012

Dec. Sep.13

U.S. dollar-denominated foreign bonds

Euro-denominated foreign bonds

years

Monthly

Mar.14

Sep. Mar.15

The amount of interest rate risk associated with foreign currency‐denominated bondinvestment at FIs has increased somewhat since the previous Report.

-- Up by 3.9 percent, from the end of September 2014 to 1.5 trillion yen at the end ofAugust 2015.

While major banks have generally adopted a restraining stance with regard toinvestment in foreign currency‐denominated bonds, regional banks have constantlyaccumulated such bonds as U.S. government bonds and bonds of foreign financialinstitutions.

-- The ratio of the amount of interest rate risk on foreign currency‐denominatedbonds to that on yen‐denominated bonds has reached a level of almost 50 percentat major banks and almost 20 percent at regional banks.

Chart V-2-8: Interest rate risk of foreign currency-denominated bonds among banks and average remaining maturity

Interest rate risk on foreign currency-denominated bonds among major banks

Interest rate risk on foreign bonds among regional banks

27

Average remaining maturity of foreign currency-denominated bonds among major banks

0.0

0.5

1.0

1.5

2.0

Mar.2012

Dec. Sep.13

Other foreign currency-denominated bonds (lhs)Euro-denominated foreign bonds (lhs)U.S. dollar-denominated foreign bonds (lhs)Ratio to yen-denominated bonds (rhs)

tril. yen

Monthly

0

10

20

30

40

50

60

70

Mar.14

Sep. Mar.15

%

Average remaining maturity of foreign currency-denominated bonds among regional banks

2

3

4

5

6

7

8

Apr.2013

Oct. Apr.14

Oct. Apr.15

years

0

2

4

6

8

10

12

14

16

18

20

0

100

200

300

400

500

600

Apr.2013

Oct. Apr.14

Oct. Apr.15

%bil. yen


The amount of market risk associated with stockholdings at FIs has decreasedsomewhat since the previous Report.

-- Down by 3.9 percent, 12.9 trillion yen at the end of June 2015 due to the lowerstock price volatility compared with that as of December 2014;

-- Market exposure itself has been increasing.

The amount of risk at the end of September 2015 stood at 15.1 trillion yen, anincrease of 12.4 percent due to the rise in stock market volatility.

Fluctuations in the amount of market risk associated with stockholdings dependlargely on the market developments. Effects on the financial conditions of FIs remainconsiderable.

Chart V-2-9: Market risk associated with stockholdings among financial institutions

Chart V-2-10: Decompositions of changes in market risk associated with stockholdings

28

-15

-10

-5

0

5

10

15

2008 09 10 11 12 13 14 June2015

Sep.

(Estimate)Factor of amount in face valueFactor of market valueFactor of volatility

y/y chg., tril. yen

Changes fromDec. 2014

Changes fromJune 2015

FY

Changes in market risk associated with stockholdings

0

10

20

30

40

50

60

0

5

10

15

20

25

2001 03 05 07 09 11 13

Market risk associated with stock investment trusts (lhs)Market risk associated with stockholdings (lhs)Ratio to adequate capital (stockholdings, rhs)Ratio to adequate capital (including stock investment

%

Je D Je S14 15

Quarterly

tril. yen

trusts, rhs)

FY


The situation surrounding the macro market risk

(1) FIs as a whole have maintained their trend of proceeding with diverse risk takingthrough financial products such as investment trusts, while maintaining high levelsof yen interest rate risk.

(2) Heterogeneity in risk‐taking stances by type of bank or of individual institutions hasbeen increasing ‐‐ with some banks adopting a cautious stance and othersincreasing their amount of risk ‐‐ reflecting varying levels of profit expectations fortheir market divisions.

(3) Although strategic stock investment has been on a moderate declining trend,market risk associated with stockholdings remains large enough to haveconsiderable effects on banks' capital strength and profits.

Under these circumstances, volatility in global financial markets, including that inJapan, has been increasing. If this trend is further reinforced, it can affect the amountof risks borne by, and the financial bases of, FIs.

Given the above, the following two points can be raised as key tasks and challenges inmarket risk management for FIs.

(1) FIs need to take and manage risks appropriately under clear securities investmentand asset‐liability management (ALM) strategies, and accurately grasp the profileof diverse risk factors from a cross‐sectional and multi‐dimensional perspective.

(2) FIs need to appropriately assess the purpose of strategic stockholdings and therebycontinue their efforts to reduce the related risk.

29


Box 4: Risk analysis of securities portfolios of regional financial institutions

Regional FIs have increased holdings of investment trusts and foreign securities.

‐‐ This reflects their growing willingness to take on diverse risks.

The weight of the amount outstanding of risky assets in the total securities portfolios:

‐‐ over 20 percent at regional banks; over 10 percent at shinkin banks.

On the other hand, in terms of the value‐at‐risk:

‐‐ around 80 percent at regional banks and around 40 percent at shinkin banks

In managing risks, it is important to consider the effects of changes in the correlation between risk factors.

Example: The VaRs based on 2015 data are greater for both regional banks and shinkin banks

‐‐ according to the comparison between the VaRs of risky portfolio assets based on the market data during

two different sample periods (2006 and 2015)

The effects of changes in volatility need to be taken into account in risk management.

‐‐ Because the present VaR reflects the volatility of yen interest rates, which has trended downward.

Chart B4-1: Exposure and individual VaR ratio by type of product

Chart B4-4: Difference in amount of risk due to correlation among risk factors

Chart B4-7: Difference in amount of risk due to volatility of risk factors

Chart B4-5: Developments of JGBs price volatility

Exposure ratio Individual VaR ratio Regional banks Shinkin banks

Sources: Bloomberg, BOJ.

Regional banks Shinkin banks

30

0.05

0.15

0.25

0.35

0.45

0.55

0.65

0.75

0.0

0.5

1.0

1.5

2.0

2.5

Aug. Aug. Aug. Aug. Aug. Aug. Aug.

% %

Volatility of JGBsreturns (rhs)

Volatility of TOPIX returns (lhs)

Volatility of U.S. government bonds returns (rhs)

1995 98 2001 04 07 10 13

0.22

0.23

0.24

0.25

0.26

0.27

Total VaRwith 2006data set


tril. yen

1.3

1.4

1.5

1.6

1.7

1.8



tril. yen


0

10

20

30

40

50

60

70

80

90

100

Regionalbanks banks

Investment trusts

Foreign currency-denominatedforeign bondsDomestic currency-denominatedforeign bondsStocks

Domestic bonds

%

Shinkin Regionalbanks banks

Shinkin

0.0

0.5

1.0

1.5

2.0

2.5

3.0



Risky assetsother thandomesticbonds

Domesticbonds

tril. yen

0.0

0.3

0.6

0.9

1.2

1.5

1.8



tril. yen

FIs have sufficient funding liquidity in yen funds.

For foreign currency‐based funding, as a whole, there is a liquidity buffer that cancover funding shortages even if market funding becomes difficult for a certain period.

-- Foreign currency‐based funding has a funding structure with a large proportion ofmarket funding.

The stability gap has recently started to narrow. It still remains considerable in size.

-- This narrowing is attributable to banks’ efforts to enhance their stable fundingsources, such as customer deposits and medium‐ to long‐term currency andforeign exchange swap funding.

Chart V-3-3: Stability gap among banks

Chart V-3-4: Resilience to foreign currency liquidity among banks



31

0

100

200

300

400

500

600

700

800

10 11 12 13 14 15

Corporate bonds, etc.Medium- to long-term yen investmentsClient related depositsLoans

CY2010

Stability gap

bil. U.S. dollars

0

5

10

15

20

25

30

35

40

Sep.2014

Nov. Jan.15

Mar. May July

bil. U.S. dollars

0

100

200

300

400

500

600

10 11 12 13 14 15Yen investments maturing within 1 monthInterbank maturing within 1 monthRepos maturing within 1 monthForeign currency liquidity

CY2010

bil. U.S. dollars

0

10

20

30

40

50

60

70

Sep.2014

Nov. Jan.15

Mar. May July

bil. U.S. dollars

V. Macro risk profiles and financial bases of financial institutions3. Funding liquidity risk (1)

The environment for foreign currency‐based market funding through currency and foreignexchange swaps of Japanese banks has generally remained favorable.

However, the cost of foreign currency‐based funding, particularly the cost of U.S. dollarfunding through the currency and foreign exchange swap markets, has continued to rise.

Factors behind this trend:

(1) foreign‐currency funding of Japanese banks has been increasing

(2) major U.S. and European banks are reviewing and making substantial changes totheir businesses in response to the implementation of various international financialregulations.

At the same time, the weight of local currency‐denominated loans has been increasing,particularly in Asia.

Chart V-3-6: Breakdown of the short-term U.S. dollar funding costs

Chart V-3-7: Currency-denominated claims for Asia among Japanese banks

Source: Bloomberg.

Sources: BIS, "Consolidated banking statistics"; BOJ.

32

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

10 11 12 13 14 15

(3) Residual(2) JPY LIBOR - JPY OIS(2) USD LIBOR - USD OIS(1) USD OISUSD rate from JPY (3-month)

%

CY2010

15

20

25

30

35

40

45

50

100

200

300

400

500

600

700

05 06 07 08 09 10 11 12 13 14 15

Local currency-denominated claims (lhs)U.S. dollar-denominated claims (lhs)Share of local currency-denominated

bil. U.S.dollars

CY20

%

claims (rhs)


Situations of the macro foreign currency funding liquidity risk

(1) Stability gap has started to narrow

This reflects efforts by major banks to enhance their stable funding sources.

But, the stability gap still remains large. Some regional banks are also faced withrelatively large stability gaps.

(2) Foreign currency funding costs keep rising

(3) The weight of local currency‐denominated loans has been increasing

‐‐ according to the situation of local currencies other than the U.S. dollar

The volatility of global financial markets has recently increased.

‐‐ If this trend is further reinforced, the effects may spread to the market fundingenvironment of Japanese banks.

Given the above, the following two points continue to be the key tasks and challenges.

(1) continuing with efforts to secure stable foreign currency funding bases andstrengthen their ability to respond to potential market stresses

(2) enhancing liquidity risk management of local currencies other than the U.S.dollar such as Asian or European currencies

33


FIs' capital adequacy ratios are sufficiently above regulatory levels.

Chart V-4-1: Capital adequacy ratios

FIs' capital has generally been at an adequate level relative to the amount of risk.

-- The amount of risk that FIs bear has remained more or less unchanged. -- Capital held by these institutions has continued to increase, mainly due to the

accumulation of retained earnings.

The ability of FIs to absorb losses and take on risks generally seems to have remainedat high levels for all types of banks.

Chart V-4-2: Risks and adequate capital among financial institutions

Chart V-4-3: Risks and adequate capital by type of bank

Internationally active banks Domestic banks (banks) Domestic banks (shinkin banks)


34

4

6

8

10

12

14

16

18

2002 04 06 08 10 12 14

%

FY

Capital adequacyratiosTier I capitalratiosCore capital ratios

4

6

8

10

12

14

16

18

2002 04 06 08 10 12 14

%

FY0

2

4

6

8

10

12

14

16

18

2012 14 16 18 20

%

FY

Total capitaladequacy ratiosTier I capitalratiosCommon equity Tier Icapital ratios

Regulatory levels(including capital buffer)

CET I

Tier I

CAR

0

10

20

30

40

50

60

70

03 04 05 06 07 08 09 10 11 12 13 14

Operational riskInterest rate riskMarket risk associated with stockholdingsCredit riskAdequate capitalAdequate capital + unrealized gains/losses on securities

tril. yen

FY20030

10

20

30

40

2009 11 13Operational riskInterest rate riskMarket risk associated with stockholdingsCredit riskAdequate capitalAdequate capital + unrealized gains/losses on securities

tril. yen

FY

0

2

4

6

8

10

12

14

16

18

20

2009 11 13

tril. yen

0

1

2

3

4

5

6

7

8

9

2009 11 13

tril. yen

V. Macro risk profiles and financial bases of financial institutions4. Financial institutions' capital adequacy (1)

FIs' capital has remained adequate relative to the amount of risk, althoughFIs' amount of market risk associated with stockholdings was up by 2.0trillion yen from the end of March 2015.

The effects of heightened volatility since summer 2015 on the soundness ofFIs are so far limited.

Nevertheless, careful attention should be paid to:

-- developments in financial markets and the Asian economy;

-- their subsequent effects on the management of FIs.

Chart V-4-4: Effect of stock price changes on adequate capital and risks by type of bank

4 scenarios

Results of analyses Major banks Regional banks Shinkin banks

For case A

35

tril. yen

End-Mar.2015

End-Sep.2015

(Estimate)

End-Mar.2015

End-Sep.2015

(Estimate)

End-Mar.2015

End-Sep.2015

(Estimate)

End-Mar.2015

End-Sep.2015

(Estimate)

53.9 53.0 29.8 29.0 16.7 16.5 7.4 7.4

37.6 39.6 21.6 23.0 12.3 12.9 3.6 3.7

Market risk associated withstockholdings

10.5 12.4 7.3 8.7 2.8 3.4 0.3 0.3

Shinkin banks

Adequate capital


Amount of risk


10.5 9.3 6.1 5.2 3.7 3.3 0.8 0.7

Internationally active banks 6.8 5.9 5.7 4.9 1.1 1.0

Unrealized gains/losses on securities(tax effects taken into account)

V. Macro risk profiles and financial bases of financial institutions4. Financial institutions' capital adequacy (2)

Case A<actual value atend-Sep. 2015>

Case B Case C Case D

-8.6% -20% -40% -55%

1.3 times 1.5 times 1.5 times 2.0 times

Stock price(change from end-March 2015)

volatility<observation period of 1 year, based on daily data>

(change from end-March 2015)

0

10

20

30

40

2014 A B C D

Operational risk

Interest rate risk

Market risk associated withstockholdingsCredit risk

Adequate capital

Adequate capital + unrealizedgains/losses on securities

tril. yen

FY

6.1 5.2 4.12.1 0.6

unrealized gains/losses on securities

0

2

4

6

8

10

12

14

16

18

20

2014 A B C D

tril. yen

3.7

3.32.8

1.91.3

FY0

1

2

3

4

5

6

7

8

9

2014 A B C D

tril. yen0.76 0.73 0.69 0.63 0.58

FY

According to the FAIXs, there is no overheating in financial intermediation.

-- Compared with the findings presented in the previous Report, all 14 indicatorshave remained unchanged, with the real estate firm investment to GDP ratioremaining "red" and the other 13 indicators "green."

• The Financial Activity Indexes (FAIXs) are indicators used to gauge overheating in various financial activities.In the Report, we identify signs of overheating by selecting as FAIXs 14 indicators that are appropriate inassessing whether financial imbalances similar to those observed during Japan's bubble period have arisen,and by examining the deviation of individual indicators from their trends. Whether financial activity isoverheating or overcooling is measured based on how far individual indicators deviate from their historicaltrends. Shaded areas in the chart represent the following: (1) areas shaded in red (the darkest shadedareas) show that an indicator has risen above the upper threshold, that is, it is tilted toward overheating;(2) areas shaded in blue (the second darkest shaded areas) show that an indicator has declined below thelower threshold, that is, it is tilted toward overcooling; (3) areas shaded in green (the most lightly shadedareas) show everything in between; and (4) areas shaded in white show the periods without data.

Chart VI-1-1: Heat map of Financial Activity Indexes

Sources: Bloomberg; Cabinet Office, "National accounts"; Japan Real Estate Institute, "Urban land price index"; Ministry of Finance, "Financial statements statistics of corporations by industry"; Tokyo Stock Exchange, "Outstanding margin trading, etc."; BOJ, "Flow of funds accounts," "Loans and bills discounted by sector," "Money stock," "Tankan."

36

CY

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

DI of lending attitudes of financial institutions

Growth rate of M2

Equity weighting in institutional investors' portfolios

Stock purchases on margin to sales on margin ratio

Private investment to GDP ratio

Total credit-to-GDP ratio

Household investment to disposable income ratio

Household loans to GDP ratio

Business fixed investment to GDP ratio

Corporate credit to GDP ratio

Real estate firm investment to GDP ratio

Ratio of real estate loans to GDP

Stock prices

Land prices to GDP ratio

Real estate

Asset prices

Financialinstitutions

Financialmarkets

Privatesector

Household

Corporate

VI. Macro risk indicators 1. Heat map

The deviation of the real estate firm investment to GDP ratio from its trend widenedcompared with 6 months ago. This reflects the fact that the investment by major realestate companies is solid, mainly against the backdrop of an improvement in realestate markets particularly in metropolitan areas.

Chart VI-1-4: Real estate firm investment to GDP ratio

The value of real estate transactions is still below the level that prevailed in or around2007, yet it has remained at a high level.

The land prices to GDP ratio has remained in line with the past trend.

Chart B5-1: Value of real estate transactions Chart B5-4: Land prices to GDP ratio

Sources: Cabinet Office, "National accounts"; Japan Real Estate Institute, "Urban land price index."

Source: Japan Real Estate Institute.

Sources: Cabinet Office, "National accounts"; Ministry of Finance, "Financial statements statistics of corporations by industry."

37

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1980 83 86 89 92 95 98 2001 04 07 10 13

Original series

Trends

%

CY

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Others HotelCommercial DistributionResidential OfficeTotal

tril. yen

CY20

0

50

100

150

200

250

300

350

1980 84 88 92 96 2000 04 08 12

Original series

Trends

March 2000 =100

CY

VI. Macro risk indicators 2. Real estate market (1)

The distribution of the rates of increases in commercial land prices (appraisal values) has notshown signs of spreading upward, as was seen during the past two real‐estate booms.

Chart B5-5: Distribution of year-on-year rates of change in commercial land prices

Chart B5-6: Distribution of individual commercial property transaction prices (23 Tokyo wards)

J‐REITs have continued high levels of fund raising, but there has been no increase inleverages.

Listed real estate companies (i.e., large corporations) other than J‐REITs have alsoincreased their fund raising, but the increase in their borrowing is limited.

Chart B5-10: Financing by J-REITs Chart B5-12: Financing by listed real estate companies other than J-REITs

Source: Ministry of Land, Infrastructure, Transport and Tourism, "Publication of market values of standard sites by prefectural government."

Source: Ministry of Land, Infrastructure, Transport and Tourism, "Real estate transaction-price information."

Source: Nikkei Needs. Source: Nikkei Needs.

38

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

06 07 08 09 10 11 12 13 14 15

Top 10-25%Top 25-50%Median

bil. yen

CY2006

-0.5

0.0

0.5

1.0

1.5

2.0

02 03 04 05 06 07 08 09 10 11 12 13 14

EquitiesInvestment corporation bondsLoansTotal

tril. yen

FY20-0.5

0.0

0.5

1.0

1.5

01 02 03 04 05 06 07 08 09 10 11 12 13 14

EquitiesBondsLong-term loansShort-term loansTotal

tril. yen

FY2000


-30

0

30

60

90

1984 88 92 96 2000 04 08 12

Top 10-25%

Top 25-50%

Bottom 25-50%

Bottom 10-25%

Median

%

CY

Chart B5-13: Debt financing by real estate companies with lower creditworthiness

The real estate market as a whole is not in an overheated condition.

-- Many indicators are still below the levels that prevailed during the real‐estateboom prior to the Lehman shock.

Nevertheless, the situation in the real estate market warrants vigilant attention since:

-- J‐REITs and overseas investors have been stepping up their property purchases,resulting in transactions in some high‐value properties in central Tokyo;

-- banks are becoming more aggressive in investment and financing;

-- there have been signs of increased borrowing by small and medium‐sized realestate companies with low credit ratings.

Chart B5-8: Office rents and vacancy rates in the Tokyo area

Chart B5-9: Capitalization rate of office buildings in Tokyo metropolitan area

Sources: Miki Shoji Co., Ltd.; BOJ, "Services Producer Price Index."

Source: Japan Real Estate Institute, "The Japanese real estate investor survey."

Source: CRD.

39

0

1

2

3

4

5

6

7

8

9

10

80

90

100

110

120

130

140

CY2002 04 06 08 10 12 14

CSPI (Office space rental, lhs)Office rents (lhs)Office vacancy rates (rhs)

CY2010 = 100 %

4.0

4.5

5.0

5.5

6.0

2005 06 07 08 09 10 11 12 13 14 15

Nihombashi RoppongiShibuya ToranomonNishi Shinjuku

%

CY

-50

0

50

100

150

1997 99 2001 03 05 07 09 11 13

Top 10-25% Top 25-50%Bottom 25-50% Bottom 10-25%Median

y/y % chg.

CY


From this issue, stress scenarios will comprise:

(1) the tail event scenario

Assess the stability of the financial system through fixed‐point observations.

The severity of stress is comparable to that observed at the time of “the Lehmanshock.”

(2) the tailored event scenario

Assess the vulnerability of the financial system against a specific event underdifferent scenarios for every test.

In this Report: “a substantial slowdown in the Asian economy.”

Chart VI-2-1: Overseas economies and the domestic economy (tail event scenario)

According to the results of macro stress testing, the financial system is considered tohave generally strong resilience against various economic and financial shocks at homeand abroad.

Overseas economies Domestic economy Output gap (domestic)

Sources: Cabinet Office, "National accounts"; IMF, "World economic outlook"; Japan Center for Economic Research, "ESP forecasts"; BOJ.

40

-6

-4

-2

0

2

4

6

10 11 12 13 14 15 16 17

Simulation

%

FY 2009-2

0

2

4

6

8

10 11 12 13 14 15 16 17

Baseline scenario

Tail event scenario

Simulation

real GDP, y/y % chg.

CY 2009

-6

-4

-2

0

2

4

6

10 11 12 13 14 15 16 17

Simulation

real GDP, y/y % chg.

FY 2009

VI. Macro stress testing 1. Stress scenarios

The credit cost ratios of FIs would exceed their break‐even points.

The number of FIs recording net losses would increase significantly.

Under these circumstances, while banks' capital adequacy ratios would declinesignificantly, FIs' capital adequacy ratios on average would be maintained aboveregulatory levels.

Chart VI-2-7: Decompositions of the CET I capital ratio and the core capital ratio (tail event scenario)

Chart VI-2-5: Credit cost ratio (tail event scenario) Chart VI-2-14: Net income ROA distribution (tail event scenario)

Internationally active banks Domestic banks

Internationally active banks Domestic banks

41

14.0

8.8

6

7

8

9

10

11

12

13

14

15

16

Bas

elin

e sc

enar

io

Incr

ease

in u

nrea

lize

d lo

sses

on

dom

esti

c se

curi

ties

hold

ings

Incr

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in u

nrea

lize

d lo

sses

on

fore

ign

secu

riti

es h

oldi

ngs

Incr

ease

in c

redi

t cos

ts

Dec

reas

e in

ope

rati

ng p

rofi

ts f

rom

core

bus

ines

s

Dec

reas

e in

ris

ky a

sset

s

Oth

ers

Tax

es a

nd d

ivid

ends

Tai

l eve

nt s

cena

rio

%

CET I capital ratioIncreasing factorDecreasing factor

11.2

9.8

6

7

8

9

10

11

12

13

14

15

16

Bas

elin

e sc

enar

io

Incr

ease

in c

redi

t cos

ts

Dec

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e in

ope

rati

ng p

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rom

core

bus

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s

Dec

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e in

ris

ky a

sset

s

Oth

ers

Tax

es a

nd d

ivid

ends

Tai

l eve

nt s

cena

rio

%Core capital ratioIncreasing factorDecreasing factor

-0.5

0.0

0.5

1.0

1.5

2.0

2013 14 15 16 17

Baseline scenarioTail event scenarioBreak-even points

%

Simulation

FY 2013 14 15 16 17

Simulation-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

13 14 15 16 17

10th-90th percentile range

FY 20

Simulation

%

VI. Macro stress testing 2. Tail event scenario

Assumes that the growth rate of the economies in the Asian region would declinesubstantially.

-- from 6.8 percent in 2014 to 6.2 percent in 2015 and to 3.0 percent in 2016

-- Such slowdown would be transmitted to other countries mainly through thechannel of real economic activity such as trade.

FIs' capital adequacy ratios on average would be maintained above regulatory levels.

-- The risk that a slowdown in Asian economies would threaten the stability ofJapan's financial system is considered to be limited.

Nevertheless, the credit cost ratio in the Asian region would rise substantially toaround the average of those in foreign countries during past financial crises.

Chart VI-2-11: Credit cost ratio (tailored event scenario)

Chart V-1-16: Credit cost ratio in each country during past financial crisis

Chart VI-2-13: Decomposition of the CET I capital ratio (tailored event scenario)

Overall Overseas Asia

Sources: ECB, "Consolidated banking data"; Federal Financial Institutions Examination Council; Jack Glen, Camilo Mondragon-Velez, "Business cycle effects on commercial bank loan portfolio performance in developing economies"; Sarawan Angklomkliew, Jason George, Frank Packer, "Issues and developments in loan loss provisioning: the case of Asia", BIS Quarterly Review, December 2009. 42

-0.5

0.0

0.5

1.0

1.5

2.0

2013 14 15 16 17

Baseline scenarioTailored event scenarioBreak-even points

%

Simulation

FY

-0.5

0.0

0.5

1.0

1.5

2.0

2013 14 15 16 17

%

Simulation

FY-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2013 14 15 16 17

%

Simulation

FY

14.0

11.9

9

10

11

12

13

14

15

16

Bas

elin

e sc

enar

io

Incr

ease

in u

nrea

lize

d lo

sses

on

dom

esti

c se

curi

ties

hol

ding

s

Incr

ease

in u

nrea

lize

d lo

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on

fore

ign

secu

riti

es h

oldi

ngs

Incr

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in c

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ts

Dec

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e in

ope

rati

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ts f

rom

core

bus

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s

Dec

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ris

ky a

sset

s

Oth

ers

Tax

es a

nd d

ivid

ends

Tai

lore

d ev

ent s

cena

rio

CET I capital ratioIncreasing factorDecreasing factor

%

0

5

10

15

20

25

Indo

nesi

a

Gre

ece

Arg

enti

na

Mex

ico

Bra

zil

Tha

iland

Rus

sia

Spai

n

Mal

aysi

a

Ital

y

Uni

ted

Stat

es

Peak level

Average of 3-year averages during financialcrisis in each country (5.0%)

%

VI. Macro stress testing 3. Tailored event scenario

The Bank of Japan is enhancing its disclosures on scenario development,methodologies, and data of macro stress testing

-- so that these can be referred to by individual FIs when they conduct stress testing.

The Bank will release a paper “Designing Scenarios of Macro Stress Testing at the Bankof Japan” (Financial System Report Annex Series).

-- a supplementary volume on the narrative and logic behind the setting of scenarios

-- In addition, the main variables in each scenario can be downloaded from theBank's web site.

To enhance the effectiveness of macro stress testing, the Bank will continue tostrengthen communication with FIs.

43

VI. Macro stress testing: the Bank of Japan's actions

Documents

Financial System Report Summary · Cases from regional banks (lhs) Cases from banks and credit cooperatives (lhs) Total amount outstanding (rhs) number of cases, thou. bil. yen FY