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Economic Survey of Japan 2009: Financial stability: overcoming the crisis and improving the efficiency of the banking sector

 

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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Japan published on 30 September 2009.

 

 

Contents

 

…accompanied by reforms in the financial market…

Reforms should also include the financial sector, where the focus at present is appropriately on emergency measures. These encompass increasing guarantees on loans to SMEs, expanding loans by public financial institutions, purchasing equities from banks and regulatory forbearance. Once a recovery takes hold, these measures should be withdrawn to limit distortions. It is also necessary to improve the regulatory architecture. While this is part of an international initiative, a number of priorities stand out for Japan. First, banks’ equity holdings should be further reduced. The experience of 2008 demonstrates once again that corrections in the stock market threaten banks’ capital adequacy and their ability to lend. Second, the transparency of securitised products needs to be enhanced to promote the stability of financial institutions and to revive this market. Third, quality and fairness in the rating process of credit rating agencies should be improved, in part through rules that prevent conflicts of interest, while progressively removing their ratings from financial regulation.

 

Credit guarantees for small and medium-sized enterprises are increasing

1. The guarantee rate is defined as the ratio of the outstanding amount of credit guarantees to the outstanding amount of loans to SMEs by banks. The definition of SMEs and the coverage of financial institutions in the BOJ statistics and the range of credit guarantees provided by the credit guarantee associations are not perfectly identical.

2. The loss rate is the ratio of subrogation payments (by the insurer) to outstanding loans. Quarterly figures are annualised.

Source: National Federation of Credit Guarantee Corporations and Bank of Japan.

 

Banks’ equity holdings have declined but remain high

Share of equities in banks’ total assets

Source: Bank of Japan and Datastream.

 

…including measures to address long-standing weaknesses

Another priority is to introduce reforms to enhance the efficiency of the financial sector and address chronic problems, notably the low profitability of the banking sector, particularly in regional institutions. It is important to accelerate the privatisation of public financial institutions to reduce distortions in resource allocation and to facilitate banks’ entry into financing sectors, such as agriculture, that remain relatively closed to them. The authorities should reduce preferential regulatory treatment of regional institutions, which leads to distortions and moral hazard problems, and encourage the rationalisation of this sector. To increase efficiency in the context of an ageing population, obstacles to the use of reverse mortgages need to be removed, thereby reducing liquidity constraints on the elderly.

 

The profitability of Japanese banks is low compared with those in other regions

1.  Data for FY 2008 refer to end-March 2009 for non-performing loans and to end-September 2008 for others.

2.  NPLs are based on figures reported under the Financial Reconstruction Law.

3.  Net income as a percentage of stockholders’ equity (no adjustment for preferred stocks, etc.).

4.  For FY 2008, the figure is estimated by doubling the net income in the first half of FY 2008 (from April to September 2008).

5.  FDIC-insured commercial banks.

6.  Fifty largest European banks. Data availability may restrict coverage to less than 50 banks for specific indicators.

Source: IMF (2009), Global Financial Stability Report, FDIC and Financial Services Agency.

 

 

How to obtain this publication

 

The complete edition of the Economic Survey of Japan is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. For the Japanese version please click here.

 

Additional information

For further information please contact the Japan Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by Randall Jones, Byungseo Yoo and Masahiko Tsutsumi under the supervision of Vincent Koen. Research assistance was provided by Lutécia Daniel.

 

 

 

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