Responses to Comments on the Proposed Revision of the Flow of Funds Accounts: The Bank of Japan's Final Decisions on the Revision
- This document excluds Boxes. The full text is available in the November 1998 issue of the Bank of Japan Quarterly Bulletin.
November 1998
Bank of Japan
Research and Statistics Department
Introduction
The Bank of Japan compiled the flow of funds accounts (hereafter, FFA) first in 1958, covering data for the years from 1954 to 1957. Since 1996, it has been conducting a study aimed at the comprehensive revision of the FFA. Based on this study, the Bank made provisional proposals on details of the revision in early 1997, inviting users of the statistics to submit their views and suggestions to the Bank.1
The comments submitted were generally in favor of the revision. They also indicated that users hoped to employ the new FFA as a tool for monitoring the effects of financial system reform (the so-called Japanese "Big Bang") and the continuing internationalization of the financial market. With regard to the details of the proposed revision, some comments supported the Bank's approach, while others suggested alternatives relating to such aspects as sectoral and transaction classifications, and the methods and format used for publishing the FFA.
As discussed in Box 1, substantial progress has been made with regard to the detailed treatment of Japan's national accounts and the availability of data, both of which were not entirely clear when the provisional proposals for the revision were drafted. In conducting the study on the details of the revision since mid-1997, the Bank has kept these developments in mind and examined whether the comments submitted meet such criteria as (1) appropriateness of statistical treatment and data-recording methods; and (2) the usefulness of revisions based on those comments. The Bank has also reviewed issues that were still undecided in the provisional proposals. Reference tables 1 and 2 show the Bank's final decisions made through the above process, and this paper tries to explain the thinking behind them.2
Based on these final decisions, the Bank is now in the process of compiling the new statistics with a view to publishing them in 1999.
- 1For details, refer to "Revision of Japan's Flow of Funds Accounts" in the August 1997 issue of the Bank of Japan Quarterly Bulletin.
- 2In addition to the points covered in this paper, numerous minor changes were made from the provisional proposals. This paper covers only the major points, and detailed explanations of individual sectors and transaction classifications will be provided separately.
I. Revision of Sectoral Classifications
The revision of sectoral classifications has two aspects: (1) subgrouping within the financial sector; and (2) classification in the nonfinancial sectors. In relation to the former, there were many comments concerning nondepository financial institutions, such as pension funds and nonbanks. One unresolved issue in relation to the latter is whether "private nonprofit institutions serving households" should be extracted as a separate category, a question which has implications for compatibility with the national accounts. Outlined below is the Bank's thinking on these issues.
A. Insurance and Pension Funds3
Most of the comments and points at issue concerning insurance and pension funds focus on the scope of the new pension fund category. Specific areas include the treatment of reserve funds pertaining to the Employee's Pension Insurance managed by individual employees' pension funds, qualified retirement pension plans ("qualified" to receive special treatment in taxation), reserves for retirement allowances, and pension assets entrusted to life insurance companies.
- 3For Japan's pension schemes, see "Flow of Funds in Japan, 1995" in the August 1996 issue of the Bank of Japan Quarterly Bulletin.
1. Reserve funds pertaining to the public pension managed by employees' pension funds
a. Summary of comments
Part of the levying of contributions and the investment of reserve funds pertaining to the Employees' Pension Insurance (the public pension) are managed by employees' pension funds. Since it is difficult to separate this portion from the contributions and reserve funds of employees' pension funds, the Bank provisionally proposed that all employees' pensions be classified under "pension funds." The counter-proposal was that the portion managed by employees' pension funds should be classified under "general government social security funds."
b. The Bank's position
Careful consideration was given to the recommendations in the System of National Accounts 1993 (hereafter referred to as the 1993 SNA) concerning the classification of pension funds and social security funds.4 On this basis, and also from the viewpoint of maintaining compatibility with the direction of revisions in Japan's national accounts, the Bank decided that it was appropriate to include the portion managed by employees' pension funds in the "pension fund" category, as provisionally proposed. As indicated in the original proposal, this decision reflects the fact that there are no separate accounts for the portion for the public pension and that for the private pension, which means that the portion for the public pension cannot be used as a basic unit for classification by itself.
- 4The 1993 SNA recommends that pension plans funded on an installment basis, and those not based on compulsory contributions, be classified in the pension fund sector. It also emphasizes that the characteristics of social security pensions are a lack of linkage between contributions and benefits, and compulsory participation. In this sense, the 1993 SNA can be said to provide clearer classification criteria for pension funds and social security funds than the 1968 SNA, which stated that "some social security funds allow voluntary participation."
2. Qualified retirement pension plans
a. Summary of comments
The Bank proposed that qualified retirement pension plans be regarded as autonomous pension plans and classified under "pension funds" as an independent economic unit on the grounds that such pensions (1) are managed through the accumulation of external contributions; and (2) exist as alternatives to and competitors with employees' pension funds. This elicited a counter-argument that the treatment of qualified requirement pension plans as autonomous pension plans was incongruous in view of its legal status.
b. The Bank's position
Both the Manual on Monetary and Financial Statistics of the International Monetary Fund (hereafter, the IMF Manual) and the 1993 SNA treat pension plans based on external contributions as autonomous pension plans. The Bank therefore intends to treat qualified retirement pension plans as pension funds in accordance with its previous proposal. Furthermore, internal accumulation pension plans are typical nonautonomous pension plans according to the 1993 SNA (Box 2).
By treating qualified retirement pension plans as autonomous pension plans, it will be possible to show company pensions in statistics by combin-ing them with employees' pension funds. This classification therefore seems appropriate from the viewpoint of making the statistics more useful.
3. Reserves for retirement allowances
a. Summary of comments
According to the previous proposal, like other reserves, reserves for retirement allowances were not to be treated as financial assets and liabilities (just as in the present treatment). There were counter-comments that these reserves should be treated as financial liabilities of companies.
b. The Bank's position
It is a possible option to treat reserves for retirement allowances as financial liabilities of companies, in light of the recommendations in the 1993 SNA. In practice, however, it is not easy to measure expenses associated with retirement income when they are incurred, and the revised national accounts of Japan will also record retirement income at the time when cash is transferred. It was therefore decided not to adopt the alternative proposal in the revision of the FFA (Box 2).
4. Pension funds entrusted to life insurance companies
a. Issue unresolved in the provisional proposals
When the provisional proposals were made, the Bank decided to consolidate the portion of pension assets entrusted to trust banks. However, it asked users of statistics to consider whether the portion of assets entrusted to life insurance companies should also be consolidated.
b. Final decision
The Bank has carried out further studies on this issue and has decided that the portion of assets entrusted to life insurance companies should also be consolidated for the following reasons. First, it is appropriate to treat pension trusts and the pension accounts of life insurance companies in the same way. Second, disclosing the pension accounts of life insurance companies would overcome obstacles to drawing up estimates.
5. Classification of nonlife insurance
a. Final decision
There were no specific comments about nonlife insurance. However, the Bank decided to make the following changes after reconsidering its position from the viewpoints of compatibility with the treatment of life insurance and limitations of source data: (1) reinsurance will no longer be treated as a separate category and will be included in nonlife insurance; and (2) private nonlife insurance companies will be treated as a subdivision of nonlife insurance companies.
B. Other Financial Intermediaries
The debate over other financial intermediaries focused on the range of institutions to be added to the financial sector and the way those institutions are treated, as well as the demarcation between financial intermediaries and financial auxiliaries. Specific issues raised included the treatment of nonbanks, financial dealers and brokers, and investment-managing entities of the national Fiscal Investment and Loan Program (FILP) funds.
1. Nonbanks
a. Summary of comments
The Bank proposed that nonbanks be included in the financial sector. Nonbanks to be included in a new "finance company" category were defined as moneylenders (institutions subject to the Law Concerning Regulation of the Money Lending Industry, including leasing and consumer credit companies). Comments included a suggestion that leasing companies that do not engage in money lending should not be classified under "finance companies."
b. The Bank's position
Finance companies referred to in the initial proposal were defined as leasing and credit companies subject to the Law Concerning Regulation of the Money Lending Industry. Finance companies as defined in the final decision (as in the initial proposal) are therefore consistent with the suggestion made in the comments.
In connection with this issue, the Bank also considered including leasing companies that do not engage in money lending in the "finance companies" category. As discussed later in this report, however, only certain kinds of financial leases will be treated as financial transactions, and it therefore appears that such a change is unnecessary.5
- 5In the final decisions, only financial leases that are recorded in company accounts as financial transactions will be treated as such. On this basis, it would be inappropriate to include all leasing companies in the financial sector (see Section II.A.4 and Box 2). However, if all financial leases were treated as financial transactions, it would be possible to include all leasing companies in the financial sector.
2. Financial dealers and brokers
a. Summary of comments
In the provisional proposals, securities companies were classified under "other financial intermediaries," and tanshi companies (money market brokers/dealers) as financial auxiliaries. There were counter-comments that (1) asked for clarification of the reason why the dealing and underwriting businesses of securities companies were categorized as financial intermediation activities; and (2) called for tanshi companies to be classified under "other financial intermediaries."
b. The Bank's position
According to the IMF Manual, a transaction is judged to be a financial intermediation activity if (1) in conducting the transaction, an intermediary accepts various risks as a result of holding financial assets and liabilities; and (2) financial flows are transformed through the transaction. Dealing and underwriting meet these criteria because, when making positions, intermediaries expose themselves to credit and price fluctuation risks, and transform cash into securities.
Having reexamined the classification of tanshi companies in light of this definition, the Bank has decided that it would be appropriate to classify them as "other financial intermediaries." The initial proposals have therefore been modified. This reflects the fact that the share of dealing activities, such as gensaki (bond sale and repurchase transactions) and bond lending transactions, is increasing in the business of tanshi companies.
3. FILP funds investment managing entities
a. Issue unresolved in the provisional proposals
With reference to the treatment of the Pension Welfare Service Public Corporation, the Postal Life Insurance Welfare Corporation, and the special account for financial deregulation of the Postal Savings Special Account, the Bank provisionally proposed two approaches: (1) treating them as "government financial institutions"; or (2) classifying them under "depository corporations" or "insurance and pension funds" depending on the sources of their investment funds.
b. Final decision
After studying this issue further, the Bank judged that, since the institutions supplying the funds substantially invest those funds, it is more appropriate to use the second method and total or consolidate the assets entrusted to the above corporations with figures for the institutions supplying funds for investment.6
- 6Specifically, these amounts are either totaled or consolidated with the figures for the institutions that supply the funds for investment as follows.
(1) The amount of the special account for financial deregulation of the Postal Savings Special Account is included in "postal savings" of "depository corporations."
(2) The amount of the Special Account for Fund-Management Operations of the Postal Life Insurance Welfare Corporation is included in "life insurance" of "insurance and pension funds" or "postal savings."
(3) The amount of the Pension-Source Strengthening Plan of the Pension Welfare Service Public Corporation is included in "public pensions" of "social security funds."
To ensure consistency with the national accounts regarding government financial institutions, the scope for institutions other than those listed above has been modified slightly. (The name of the category has been changed to "public financial institutions.")
C. Nonfinancial Sector
The Bank received many favorable comments about the improvement in compatibility between the classifications for the nonfinancial sector in the FFA and those used in the national accounts. In view of those comments, the treatment of private nonprofit institutions serving households has become an issue.7
1. Issue unresolved in the provisional proposals
The Bank proposed that private nonprofit institutions serving households be included in the household sector. From the viewpoint of consistency with the national accounts, however, the Bank recognized that it was preferable to separate such institutions from the household sector. The Bank indicated, therefore, that there was room to reconsider this issue depending on the availability of source data.
2. Final decision
Because of the support expressed for greater compatibility with the national accounts, the Bank has worked to improve the availability of source data relating to private nonprofit institutions serving households. As a result of this work, it now appears that it will be possible to estimate the principal assets and liabilities of private nonprofit institutions serving households by modifying deposit and loan statistics and improving the availability of other information, such as bondholder data. Private nonprofit institutions serving households will therefore be separated from the household sector, and shown as a separate category in the new FFA.
- 7The initial proposals have been modified somewhat to reflect the direction of changes in the national accounts in relation to the treatment of public institutions including public nonfinancial corporations, the central government, and social security funds.
II. Review of Financial Transaction Classifications
The Bank proposed that several existing items, such as "currency" and "government deposits," be eliminated as separate items in the accounts. However, comments about financial transaction classifications show that a number of users want these items retained in the new FFA. Comments about new items focused on the treatment of financial leases. The Bank's thinking on these matters is outlined below.
A. Currency/Deposits and Loans
1. Currency
a. Summary of comments
The Bank proposed that "currency" and "deposits" be aggregated and shown as "currency and deposits" ("currency" is a separate item in the existing statistics). However, a number of people advocated retaining "currency" as a separate item as at present.
b. The Bank's position
These suggestions appear to reflect a need for data about currency. It has been decided, therefore, to show currency as a separate item, after making some improvements in the method used to estimate the currency held by each sector.
2. Government deposits
a. Summary of comments
The Bank proposed that government current deposits, which are treated as a separate item in the present statistics, be recategorized under "transferable deposits." However, some people argued that government current deposits should be retained as a separate item as at present.
b. The Bank's position
These comments suggest that there is a need for data on government deposits. Moreover, it may be inappropriate, given the special nature of government cash flows, to treat government deposits in the same way as ordinary deposits at banks. It was decided, therefore, to retain government deposits as a separate item in the new FFA.8
- 8"Government deposits" include not only "government current deposits," which are shown in the existing statistics as a separate item, but also "special deposits," "designated domestic deposits," "designated deposits in foreign currencies," and "reserve deposits for government fractional notes issued." In the new FFA, government current deposits will not be extracted and shown separately. Instead, all these various deposits will be aggregated and shown as "government deposits."
3. Trust beneficiary rights
a. Summary of comments
It was previously proposed that, while sectoral classification for trusts should be reclassified in accordance with the type of trust account, the financial transaction classification should be as in the present statistics, where trust beneficiary rights on money trusts are aggregated. However, there were comments calling for the separation of trust beneficiary rights into beneficiary rights in collectively managed trusts (collectively managed money and loan trusts) and beneficiary rights in noncollectively managed trusts such as separately managed money trusts, tokkin (designated money trusts), and fund trusts.
b. The Bank's position
Comment suggests that there is a need for a more detailed breakdown of trust beneficiary rights. However, the aggregate amounts of beneficiary rights in collectively managed trusts and beneficiary rights in noncollectively managed trusts (excluding the portion that is consolidated with consigning investors' accounts) can be determined from the collectively managed trusts of depository corporations and the noncollectively managed trusts of other financial intermediaries.9 Accordingly, it has been decided to record trust beneficiary rights in aggregate.
- 9The Bank previously proposed the establishment of a separate item called "deposit-like trusts" and "money in trusts other than deposit-like trusts." The names have been changed respectively to "collectively managed trusts" and "noncollectively managed trusts."
4. Financial leases
a. Summary of comments
The Bank proposed that financial leases be treated as financial transactions in line with the recommendations of the 1993 SNA and the IMF Manual. This drew the comment that, while financial leases have certain financial characteristics, they are basically transactions involving the rental of goods and, therefore, different from ordinary financial transactions such as bank loans.
b. The Bank's position
In essence, the 1993 SNA and the IMF Manual state that even if financial leases are legally structured as transactions involving the rental of goods, their economic substance makes it necessary to treat them as financial transactions. However, the availability of source data is limited by a number of factors, including the way these transactions are actually treated in corporate accounting. This is also reflected in the revisions being made in the national accounts, which are likely to move away from the approach used in the 1993 SNA. For the purposes of the present revision of the FFA, therefore, it has been decided to treat as financial transactions only those financial leases that are treated as such in corporate accounting, as in the case where the ownership of lease assets is transferred. For this reason, lease transactions that are shown in accounts as financial transactions will be shown as "installment credit included in consumer credit" together with deferred credit and other installment claims (Box 3).
B. Foreign Transaction Items
1. Foreign trade credit
a. Summary of comments
The Bank proposed that trade credit (domestic inter-company credit) and foreign trade credit be aggregated and shown as redefined "trade credit." This drew comments noting that "foreign trade credit" is a broad concept that includes credit provided by financial institutions, and should therefore be separated from trade credit (domestic inter-company credit).
b. The Bank's position
According to the spirit of the 1993 SNA and the IMF Manual, the scope of trade credit is limited to claims and debts incurred in connection with ordinary commercial transactions. It seems appropriate, therefore, to treat such credit as cross-border inter-company credit. Accordingly, foreign trade credit and trade credit (domestic inter-company credit) will be shown as a single item, as proposed previously. This is different from the treatment of these items in the present statistics, where credit provided by financial institutions in connection with trade transactions is included in foreign trade credit.
2. Other external claims and debts
a. Summary of comments
The recommendation in the provisional proposals was to separate outward investment in securities from "other external claims and debts" and to show it as a separate item. Comments on this matter called for the provision of more detailed data on (1) the composition of other external claims and debts such as deposits, bonds, and shares; and (2) inward investment in securities and foreign exchange reserves.
b. The Bank's position
In response to preferences expressed in the comments, it was decided to separate not only outward investment in securities, but also overseas deposits and overseas loans from "other external claims and debts," and to include them in "deposits" and "loans." Overseas deposits and loans will be shown in the overseas sector's liabilities column.
With regard to foreign transactions in Japan, inward investment in securities will be included under "securities other than shares" and "shares" in the overseas sector's assets column, while nonresident deposits and nonresident loans will be shown under "deposits" and "loans" in the overseas sector's assets column. As requested in the comments, inward investment in securities will be broken down, within the limits imposed by the source data, according to the types of securities in which funds are invested.
Foreign exchange reserves will be shown in the liabilities column of the overseas sector, but the corresponding assets will be included only as an aggregate value under "other external claims and debts," because of limitations of source data.10
- 10In the initial proposal, it was suggested that foreign exchange reserves be broken down into monetary gold, Special Drawing Rights (SDRs), and other foreign exchange reserves. Since the amounts of gold and SDRs are minimal, however, it was decided to cease showing these as separate sub-categories, and aggregate them instead. Foreign exchange reserves will be shown as a sub-item under "other external claims and debts."
Reference Table 1
Reference Table 2