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The Financial Macro-econometric Model (FMM, March-2020 Version): Overview and Recent Developments

August 27, 2020
Financial System and Bank Examination Department
Bank of Japan


The Bank of Japan developed the Financial Macro-econometric Model (FMM) in 2011. The FMM is employed to conduct macro stress testing for comprehensive quantitative analyses of the stress resilience of Japan's financial institutions, and the results are published twice a year in the Financial System Report. The FMM is continually being developed to ensure that the Bank's macro stress testing can capture the key issues when assessing the stability of the financial system by appropriately incorporating the transmission mechanisms of shocks. Recently, macro stress testing results based on the FMM have been employed in new areas: in the Bank's dialogue with individual financial institutions during its on-site examinations and off-site monitoring; and in the comparative examinations in supervisory simultaneous stress testing which are based on common scenarios and conducted jointly with the Financial Services Agency of Japan.

In this paper we present the basic framework of the FMM and the macro stress testing based on the FMM, and explain five major enhancements of the model that have been made in recent years. We have improved the loan function by taking nonlinearity into account; and refined the credit cost model using granular data. We have developed a new framework of a medium- to long-term simulation of financial institutions' profits and stress testing that assumes a stress event in the medium- to long-term future. We have refined the model to take into account the room held by securities investment for locking in gains, and we have incorporated the effect of increases in foreign-currency funding costs in times of stress. Finally, we describe caveats in the use of the FMM and consider some issues for its use in the future.


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Financial System Research Division,
Financial System and Bank Examination Department

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