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Profits of Japanese Banks and Market Valuations

Comparison between Net Income and Comprehensive Income

October 4, 2011
Yuji Yamashita and Toshiyuki Sakiyama
Financial System and Bank Examination Department

From fiscal 2010, Japan's listed companies are obliged to disclose Comprehensive Income (CI). In Japan, CI is disclosed in Statements of Comprehensive Income, which are attracting considerable attention. In the United States, Other Comprehensive Income, including gains/losses on Available-for-Sale securities, is said to have become a focus of attention since 1998, when CI was introduced. Therefore, the perspective of financial markets in valuing Japanese financial institutions is likely to change to attach more importance to CI. CI of Japanese banks is more volatile than Net Income by far, reflecting the significant price volatility in equities held. Thus, once financial markets start to pay more attention to CI, the risk recognition of Japanese banks' profits can heighten. This can affect Japanese banks in terms of funding costs and so on. In this situation, Japanese banks are required to evaluate more prudently the balance between risks and returns in holding equities, and to make efforts to reduce risks when judged as being excessive.

Notice

Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2011-E-5, is a translation of the original Japanese version, Bank of Japan Review 2011-J-7, published in July 2011.

The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan. If you have comments or questions, please contact Yuji Yamashita at yuuji.yamashita@boj.or.jp.