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Financial System Report

An Assessment of Financial System Stability
-- Focusing on the Banking Sector --

August, 2005
Bank of Japan

Click on fsr05a.pdf (527KB) to download the full text.

Introduction

After more than a decade of struggle, Japan's financial system has almost overcome the nonperforming-loan (NPL) problem, and has entered a new phase of development. The full removal of the blanket guarantee of deposits on April 1, 2005 was a symbolic event of this phase shift.

In view of the changing circumstances, the Bank of Japan published, on March 22, 2005,* "The Bank of Japan's Measures regarding the Financial System after the Full Removal of Blanket Guarantee of Deposits." In this statement, the Bank announced that its basic stance in financial system policy would shift from crisis management to supporting private-sector initiatives toward providing more efficient and advanced financial services via fair competition, while maintaining financial system stability. In this regard, the Bank underwent organizational reforms to adapt to this shift: the establishment of the Financial Systems and Bank Examination Department, by integrating the Financial Systems Department and the Bank Examination and Surveillance Department; and the establishment of the Center for Advanced Financial Technology in the new department.

The announcement to start the publication of the Financial System Report (FSR) is another component of the statement. The FSR is comprised of two regular reports: one to evaluate the stability and functioning of the financial system; and the other to explain the Bank's policy. This report, "An Assessment of Financial System Stability: Focusing on the Banking Sector," in conjunction with "Measures Taken by the Bank of Japan for Financial System Stability" is the first issue of these reports.

The aim of this report is to examine, (1) the soundness of individual financial institutions, (2) the risks of macroeconomic imbalances or ones in the financial system, and (3) the functioning of the financial system in relation to the sound development of Japan's economy.

Ensuring the soundness of individual financial institutions is vital in maintaining overall stability of the financial system. It is of more significance when the system or the economy is unstable. Under such circumstances, a failure of an individual financial institution may trigger materialization of systemic risk.

Avoiding the risks of macroeconomic imbalances or ones in the financial system is essential in maintaining financial stability. Measures to this end include: prompt identification of macroeconomic risk factors that affect the banking sector; comprehensive analysis of the financial activities of economic entities, including banks, firms, and households, to check for the presence of any excessiveness or distortion; and thorough examination of whether this could result in the materialization of systemic risk.

Verifying the functioning of the financial system is the key to support the sound development of Japan's economy. It is also important to seek ways to enhance its functioning in this regard.

The Bank will publish this report annually to provide a comprehensive analysis and evaluation of Japan's financial system. The Bank will also continue to publish, simultaneously with this report, "Measures Taken by the Bank of Japan for Financial System Stability" to enhance the transparency of its policy measures.

  • The original version in Japanese was published on March 18, 2005.