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Japan's Financial Structure since the 1980s - in View of the Flow of Funds Accounts*1

  • *1This is a full translation of the original Japanese version released on March 15, 2005.

July 8, 2005
Bank of Japan
Research and Statistics Department

Click on ron0503a.pdf (493KB) to download the full text.

Abstract

The Bank of Japan, which has been releasing Flow of Funds Accounts fiscal year data on a 1993 SNA basis since 1990, has now retroactively converted earlier data running back to 1980 so that 1993 SNA basis time-series data are now available from 1980 to the present day. These revised long-term time-series data clearly show the dramatic changes in Japan's financial structure, in particular, the expansion of financial flows and growth of financial assets/liabilities during the late 1980s, and their contraction and deceleration in the 1990s. These changes and features since the 1980s, as seen from the Flow of Funds Accounts, are discussed below from two main aspects: the domestic nonfinancial sector and financial intermediaries.

Changes and features of the domestic nonfinancial sector since 1980

The financial investments and fundraising (financial flows) of Japan's nonfinancial sector show significant changes when comparing the 1980s with the 1990s and onwards. In the 1980s, the households sector was the largest fund providing entity. The private nonfinancial corporations sector ranked as the largest borrowing entity, but also invested large amounts of funds in the late 1980s. From the 1990s onwards, funds provision by the households sector gradually declined. The private nonfinancial corporations sector reduced its assets and liabilities, which had expanded in the 1980s, and the general government sector became the largest fund borrowing entity.

In terms of financial surpluses and deficits, during the 1980s the households sector maintained a large financial surplus and acted as the main fund providing entity while the private nonfinancial corporations sector expanded its financial deficit amid active business fixed investment.

Furthermore, in the late 1980s the private nonfinancial corporations sector, which was the largest fundraising entity, increased both fundraising and financial investment transactions to lift financial gains, and became one of the largest financial investment entities as well.

These changes in the 1980s expanded the total financial flows of the domestic nonfinancial sector on a large scale. The financial assets and liabilities of the domestic nonfinancial sector also increased substantially due to the expansion of financial flows and the rise in stock and other financial asset prices. In the general government sector, the financial deficit turned to a financial surplus with the rise in tax revenues in the late 1980s.

In the early 1990s, while the households sector maintained its high financial surplus, the private nonfinancial corporations sector greatly reduced its financial deficit, mostly from a major contraction in business fixed investment. Meanwhile, the general government sector fell into a financial deficit because of declining tax revenues and increasing public investment. Amid these developments, the overall financial flows of the domestic nonfinancial sector declined sharply as private nonfinancial corporations reduced both fundraising and financial investment transactions.

From the mid 1990s, the households sector reduced its financial surplus due to a decline in savings rates, and the general government sector expanded its financial deficit as tax revenues diminished and social security related expenditures increased. On the other hand, the private nonfinancial corporations sector replaced the households sector as the leading financial surplus entity. The financial flows of the domestic nonfinancial sector decreased further as the nonfinancial corporations sector reduced its debt (borrowings) and kept financial investments at a low level.

Since the 1990s, the growth rate of the financial assets and liabilities of the domestic nonfinancial sector has slowed down due to this decrease in financial flows and a decline in financial asset prices.

In the private nonfinancial corporations sector, however, a large financial surplus pushed the difference between the financial assets and financial liabilities (excluding shares and other equities) above zero in FY 2003 for the first time since FY 1989. This demonstrates that financial balance sheet restructuring has been advancing.

Structural change in Japanese financial intermediaries since 1980

Since the 1980s, fundraising and investment by the domestic nonfinancial sector have mainly been handled by financial intermediaries. The proportion of funds directly invested and raised by the domestic nonfinancial sector has remained small.

Nevertheless, the structure of Japan's financial intermediaries has changed over the years. In the 1980s, private financial intermediaries were the main fund handlers, but in the 1990s this role shifted to public financial intermediaries. In the 1980s private financial intermediaries such as private depository corporations, which had the largest share of financial assets outstanding, were actively involved in financial intermediary activities, including the provision of loans via nonbanks (finance companies).

In the 1990s the weight of financial intermediary activities shifted from private financial intermediaries to public financial intermediaries. Among depository corporations, funds flowing into postal savings expanded while financial investment (flow) by private depository corporations diminished, mainly in the area of providing loans. Public financial institutions expanded their share of financial assets outstanding, with growth in areas such as insurance and pension funds (postal life insurance) and other financial intermediaries (public financial institutions). In other words, there was a shift in the flow of funds via financial intermediaries from the private sector in the 1980s to the public sector in the 1990s.

From FY 2000 to FY 2003, however, the weight of public financial intermediaries has slightly decreased, with a decline in the amount of funds flowing into postal savings and a contraction of the Fiscal Loan Fund.

Today, the fundraising of the domestic nonfinancial sector still centers round the public sector, but the amount of funds handled by public financial intermediaries has decreased. At private financial intermediaries, investments have shifted from providing loans to private nonfinancial corporations to providing credit to the government sector by purchasing securities.