IMF published five technical notes under the 2017 Financial Sector Assessment Program (FSAP) with Japan. This assessment comprises technical notes on the wide spectrum of financial sector, including banking, insurance, and securities.
Technical Note on Insurance Sector Regulation and Supervision. This note provides an update on the insurance sector in the country, along with an analysis of certain key aspects of the regulatory and supervisory regime. The technical note refers to the Insurance Core Principles (ICPs) issued by IAIS in October 2011, as revised in November 2015. The note includes an analysis of Japanese practice in relation to selected ICPs, instead of a detailed assessment of observance of the ICPs. The assessment reveals that the regulatory and supervisory framework has been enhanced since the 2012 FSAP. Work is underway to develop a risk assessment methodology for insurance supervision. Corporate governance and solvency standards are two key elements supporting risk-based supervision. The risk and impact assessment will enable JFSA to determine the appropriate supervisory intensity for each insurer, along with a holistic supervisory plan.
Technical Note on Detailed Assessment of Observance on Basel Core Principles (BCPs) for Effective Banking Supervision. This note summarizes assessment of the current state of the implementation of BCPs in Japan. Out of the 29 BCPs, Japan was found Compliant with 14 principles, Largely Compliant with 13, and Materially Non-Compliant with 2 principles. Japan was found to be materially non-compliant with principle on transactions with related parties and on the principle on capital adequacy, with a lack of Pillar 2 capital framework to tailor capital requirements more closely to individual bank risk profiles. The note also highlights that banking regulations and supervisory processes have undergone significant improvements since the last FSAP. Capital, liquidity, and disclosure requirements have been updated to incorporate the Basel III reforms agreed by the Basel Committee, in accordance with the internationally agreed timelines.
Technical Note on Long-Term Challenges for Financial Intermediation. This note analyzes and quantifies the effect of aging in Japan—both at the national and regional levels—on the nature of financial intermediation and concludes that the relative role of banks is likely to diminish. Financial constraints to small- and medium-size enterprises and startups exacerbate the adverse effects of an aging society on productivity and economic growth. Financial sector policies should aim to address the constraints to financial access by further promoting risk-based lending and asset-based lending.
Technical Note on Regulation and Supervision of Securities. This note reviews the functioning and effectiveness of the regulation and supervision of securities firms in Japan, using the relevant International Organization of Securities Commissions (IOSCO) documents as benchmarks. The note also discusses the regulatory and supervisory framework for the securities business conducted by banks and other financial institutions. The note highlights that the IMF-recommended review of the prudential framework—to be conducted within medium-term—should ensure that the framework appropriately addresses the financial stability and investor protection risks potentially arising from smaller firms’ activities. Such a review is needed to ensure that the framework remains appropriate when markets change.
Technical Note on Systemic Risk Analysis and Stress Testing the Financial Sector. This note offers insights from a comprehensive set of stress tests conducted for banks and insurers under the FSAP. The aim of the FSAP stress test was to assess the resilience of the whole financial sector, rather than the capital adequacy of individual institutions. The top-down banking sector stress test covered 20 large banks, comprising 90% of the banking system assets. The results of these tests point to a broadly stable banking system, but some vulnerabilities exist among regional banks—three regional banks would need additional capital to meet the 8% total capital requirement, although the number is very small in terms of ratio to GDP. Additionally, top-down and bottom-up stress tests were conducted for seven life and six non-life companies, covering 73% and 92% of the respective sectors. Being less sensitive to higher interest rates, the non-life sector performs better, with a less-marked decline in average solvency margin ratios.
Keywords: Asia Pacific, Japan, Banking, Insurance, Securities, FSAP, BCP, ICP, Basel III, Stress Testing, IMF