Visit to China: Second Day
Cabinet Secretariat, Friday, October 26, 2018
[Provisional translation]
On October 26, 2018, (local time), Prime Minister Shinzo Abe, who is visiting Beijing in the People’s Republic of China, held a meeting with H.E. Mr. Li Zhanshu, Chairman of the Standing Committee of the National People's Congress of China.
Following that, Prime Minister Abe attended a welcome ceremony. The Prime Minister then held a meeting with H.E. Mr. Li Keqiang, Premier of the State Council of the People's Republic of China, as well as a signing ceremony and joint press announcement. Afterwards, the Prime Minister attended the First Session of the China-Japan Third-Party Market Cooperation Working Mechanism.
In the afternoon, Prime Minister Abe interacted with students at Peking University, and then held a meeting with H.E. Mr. Xi Jinping, President of the People’s Republic of China.
Visit to China: First Day
Cabinet Secretariat, Thursday, October 25, 2018
[Provisional Translation]
Prime Minister Abe first held a meeting with H.E. Mr. Li Keqiang, Premier of the State Council of the People's Republic of China. The Prime Minister then attended a commemorative photograph session with those who have close ties to the conclusion of the Treaty of Peace and Friendship between Japan and China, and visited a photography exhibition on Japan-China economic and trade cooperation. Afterwards, Prime Minister Abe attended a reception to commemorate the 40th anniversary of the conclusion of the Treaty of Peace and Friendship between Japan and China.
Press Conference on the Visit to China
Cabinet Secretariat, Thursday, October 25, 2018
[Provisional Translation]
On October 25, 2018, Prime Minister Shinzo Abe held a press conference at the Prime Minister’s Office. Regarding his visit to China, the Prime Minister said,
“This year marks the 40th anniversary of the conclusion of the Treaty of Peace and Friendship between Japan and China. With an eye on this anniversary, both countries have made steady efforts together to improve our relations. Furthermore, this is the first official visit by a Japanese prime minister to China in seven years and, through this visit, I hope to elevate the relations between our two countries to a new stage.
Japan and China share great responsibility for the peace and prosperity of the region and the world. With this shared recognition, I would like to hold frank and in-depth discussions with President Xi Jinping and Premier Li Keqiang not only on bilateral relations, but also on various global issues. In particular, regarding the issue of North Korea, I intend to confirm our cooperation towards the denuclearization of the Korean Peninsula and the resolution of the abductions issue, which is of the utmost importance to Japan.
Additionally, I would like to hold a frank exchange of views on strengthening the system of free and fair trade, and how to make the East China Sea a “Sea of Peace, Cooperation and Friendship.”
Visit to Europe: Fourth Day & ASEM Summit Meeting: Second Day
Cabinet Secretariat, Friday, October 19, 2018
[Provisional Translation]
On October 19, 2018 (local time), Prime Minister Shinzo Abe, who is visiting Brussels in the Kingdom of Belgium, attended the 12th Asia-Europe Meeting (ASEM) Summit Meeting. Prime Minister Abe participated in the first plenary session on topics such as strengthening the World Trade Organization, enhancing Europe-Asia connectivity, and sustainable growth, and the second plenary session on topics including climate change, plastic litter in the oceans, and the empowerment of women and girls.
Afterwards, Prime Minister Abe held a summit meeting with H.E. Prof. Giuseppe Conte, President of the Council of Ministers of the Italian Republic, and then attended the ASEM Summit Meeting family photo. Later, Prime Minister Abe held a summit meeting with H.E. Mr. Lee Hsien Loong, Prime Minister of the Republic of Singapore.
Lastly, Prime Minister Abe held a summit meeting with H.E. Mr. Sebastian Kurz, Chancellor of the Republic of Austria.
After returning to Japan, the Prime Minister previewed the next model of official government aircraft.
Japan-Austria Summit Meeting
Foreign Affairs, Friday, October 19, 2018
On Friday, October 19, commencing at 4:28 p.m. for approximately 25 minutes, Mr. Shinzo Abe, Prime Minister of Japan, held a meeting with H.E. Mr. Sebastian Kurz, Chancellor of the Republic of Austria, during his visit to Brussels to attend the Asia-Europe Meeting (ASEM) Summit. The overview of the meeting is as follows.
1. Beginning and bilateral relations
Prime Minister Abe expressed his pleasure to meet Chancellor Kurz for the first time, and explained that he intends to foster the momentum for the 150th anniversary of the establishment of diplomatic relations between Japan and Austria next year with Chancellor Kurz. In response, Chancellor Kurz stated that Japan is an important partner in Asia, and he is pleased to be able to celebrate the 150th anniversary next year. In addition, the two leaders welcomed the entry into force of the new tax convention between Japan and Austria at the end of this month, and shared the view that investment and economic exchanges will be promoted further.
2. Japan-European Union (EU) relations
(1) The two leaders shared the view that they will collaborate towards the early entry into force of the Japan-EU Economic Partnership Agreement (EPA) and Strategic Partnership Agreement (SPA), which were signed in July under Austria’s Presidency of the Council of the EU.
(2) In addition, with regard to the United Kingdom’s withdrawal from the EU, Prime Minister Abe stated that it will be essential that transparency and foreseeability be ensured in the exit process as well as legal stability by establishing a transition period. In response, Chancellor Kurz explained that challenges remain with regard to Brexit, but he will continue to make efforts to resolve them.
3. North Korea situation
The two leaders shared the position that full implementation of the United Nations Security Council (UNSC) Resolutions is necessary for denuclearization of the Korean Peninsula, and confirmed that Japan and Austria will cooperate closely. In addition, Prime Minister Abe requested understanding and cooperation towards the early resolution of the abductions issue, and Chancellor Kurz responded by stating that if there is anything Austria can do, it intends to cooperate.
Japan-Germany Summit Meeting
Foreign Affairs, Thursday, October 18, 2018
On Thursday, October 18, commencing at 6:55 p.m. (local time) for approximately 20 minutes, Mr. Shinzo Abe, Prime Minister of Japan, who was visiting Brussels in Belgium to attend the Asia-Europe Meeting (ASEM), held a meeting with H.E. Dr. Angela Merkel, Federal Chancellor of the Federal Republic of Germany. The overview of the meeting is as follows.
1. Bilateral Relations
Prime Minister Abe stated that he was pleased to meet with Chancellor Merkel again after the G7 Charlevoix Summit, and that he would like to promote cooperation in the security and the economy fields as well as regarding Western Balkan countries toward Chancellor Merkel’s upcoming visit to Japan.
Chancellor Merkel also expressed that she was pleased to meet with Prime Minister Abe again, and extended her congratulations on his reelection in the LDP Presidential Election. In addition, Chancellor Merkel stated that she would like to proceed with preparations toward her upcoming visit to Japan. She also stressed that Japan and Germany, as well as Prime Minister Abe and she, are extremely strong partners, sharing positions on various issues. She also stated that she would like to continue to promote cooperation in fields such as economy, science and technology, and security.
2. Trade and Japan-EU Relations
The two leaders shared the viewsthat Japan-Europe and Japan-Germany cooperation is essential for the promotion of free trade, and that they will continue to cooperate toward the earlyentry into force of the Japan-EU Economic Partnership Agreement (EPA) and the Japan-EU Strategic Partnership Agreement (SPA). They confirmed the importance of the rule-based multilateral trading system centered on the World Trade Organization (WTO). In addition, the two leaders exchanged views on the UK’s withdrawal from the EU.
3. North Korea Situation
The two leaders shared the views that complete implementation of the United Nations Security Council (UNSC) Resolutions is necessary for the denuclearization of the Korean Peninsula, and confirmed that the two countries would cooperate closely. In addition, Prime Minister Abe requested Germany’s understanding and cooperation towards promptly resolving the abductions issue, and he obtained support from Chancellor Merkel.
Press Conference by the Prime Minister (1) (Information Regarding the Release of Mr. Jumpei Yasuda)
Cabinet Secretariat, Wednesday, October 24, 2018
[Provisional Translation]
On October 24, 2018, Prime Minister Shinzo Abe held a press conference at the Prime Minister’s Office.
With regard to information regarding the release of Mr. Jumpei Yasuda, the Prime Minister said,
“I am greatly relieved to receive information about the release. We will identify as quickly as possible whether the individual released was Mr. Jumpei Yasuda. Ever since this incident occurred, the Government has been making all possible efforts. Under such circumstances, many countries including Qatar and Turkey have expressed their solidarity with us. In particular, I would like to thank Qatar and Turkey for their immense cooperation.”
Press Conference by the Prime Minister (2) (Information Regarding the Release of Mr. Jumpei Yasuda)
Cabinet Secretariat, Wednesday, October 24, 2018
[Provisional Translation]
On October 24, 2018, Prime Minister Shinzo Abe held a press conference at the Prime Minister’s Office.
With regard to information regarding the release of Mr. Jumpei Yasuda, the Prime Minister said,
“It was confirmed that the individual released was Mr. Jumpei Yasuda. I have received reports that he is talking with Embassy personnel in good spirits. We are taking steps so that Mr. Yasuda returns to Japan as soon as the preparations are complete.
I have just made telephone calls to Emir Tamim of Qatar and President Erdoğan of Turkey, who lent their cooperation for the rescue and protection of Mr. Yasuda, and expressed my gratitude to them. On behalf of the people of Japan, I would like to convey our deep appreciation to the leaders of countries around the world, including Qatar and Turkey, our friends, and all other partners concerned who have extended us their cooperation.”
Japan-Turkey Summit Telephone Conversation
Foreign Affairs, Wednesday, October 24, 2018
Mr. Shinzo Abe, Prime Minister of Japan, had a telephone conversation for approximately 10 minutes commencing at 6:40 p.m. on Wednesday, October 24, 2018, with H.E. Mr. Recep Tayyip Erdoğan, President of the Republic of Turkey. The overview is as follows.
1. Prime Minister Abe stated this telephone conversation was to express sincere gratitude directly to President Erdoğan who did significant efforts concerning the Japanese journalist who was captured in Syria and released in Turkey. Prime Minister Abe deeply thanked for significant efforts by President Erdoğan and Turkish government officials for the release and protection of Japanese journalist.
2. In response, President Erdoğan stated President was really glad that the Japanese journalist could enter Turkey with the support of Turkish authorities, would like to continue to support his early return to Japan, and hoped to develop the bilateral relationship in various areas.
Japan-Turkey Foreign Ministers’ Telephone Conversation
Foreign Affairs, Wednesday, October 24, 2018
Mr. Taro Kono, Minister for Foreign Affairs, had a telephone conversation for approximately 10 minutes commencing at 4:30 p.m. on Wednesday, October 24, 2018, with H.E. Mr. Mevlüt Çavuşoğlu, Minister of Foreign Affairs of the Republic of Turkey. The overview is as follows.
1. Minister Kono, referring to the release and protection of the Japanese journalist who was captured in Syria, expressed his gratitude to the effort by Turkish government. In return, Minister Çavuşoğlu welcomed the release of him who was captured in Syria for a long time and expressed that he was satisfied with the result. Minister Çavuşoğlu also stated that the Turkish authorities have been contacting closely with Japan, and Turkey would support that Japanese side could meet with him and identify, and he could return to Japan as soon as possible.
2. The two Ministers shared the view that they would continue to cooperate in the Japan-Turkey relationship and the regional issues.
Japan-Canada Summit Telephone Talk
Foreign Affairs, Thursday, October 25, 2018
On October 25, commencing at around 9:15 A.M. for approximately 30 minutes, Mr. Shinzo Abe, Prime Minister of Japan, held a summit telephone talk with the Right Honourable Justin Trudeau, Prime Minister of Canada. The overview of the meeting is as follows.
1. Prime Minister Trudeau explained the current situation of the domestic procedures for the TPP 11 Agreement in Canada. Both leaders confirmed the importance of the early entry into force of the Agreement.
2. In addition, Prime Minister Trudeau explained an agreement reached on the United States-Mexico-Canada Agreement (USMCA). In response, Prime Minister Abe expressed his expectation that the Agreement would lead to the liberalization and stable development of trade in the North America region.
G7 Foreign Ministers' Statement on the Announcement of the Death of Jamal Khashoggi
Foreign Affairs, Wednesday, October 24, 2018
We, the G7 Foreign Ministers, of Canada, France, Germany, Italy, Japan, the United Kingdom, the United States of America, and the High Representative of the European Union, condemn in the strongest possible terms the killing of journalist Jamal Khashoggi, which the Kingdom of Saudi Arabia has confirmed took place in its consulate in Istanbul.
The confirmation of Mr. Jamal Khashoggi's death is a first step toward full transparency and accountability. However, the explanations offered leave many questions unanswered.
We reiterate our expectation for a thorough, credible, transparent, and prompt investigation by Saudi Arabia, in full collaboration with the Turkish authorities, and a full and rigorous accounting of the circumstances surrounding Mr. Khashoggi's death. Those responsible for the killing must be held to account. Saudi Arabia must put in place measures to ensure something like this can never happen again.
The circumstances of Mr. Khashoggi's death reaffirm the need to protect journalists and freedom of expression around the world.
We also extend our deepest condolences to Mr. Khashoggi's family, his fiancée, and his friends.
Council on Investments for the Future
Cabinet Secretariat, Monday, October 22, 2018
[Provisional Translation]
On October 22, 2018, Prime Minister Shinzo Abe held the 20th meeting of the Council on Investments for the Future at the Prime Minister’s Office.
At the meeting, a discussion was held on promoting employment of elderly persons, expanding mid-career recruitment, and reviewing the traditional recruiting practice of periodically hiring new college graduates, as well as on disease prevention and preventative nursing care.
Based on the discussion, the Prime Minister said,
“Today, we held a discussion on the reform of the social security system oriented to all generations, which the Abe Cabinet has raised as its greatest challenge.
To begin with, on raising the age limit to over 65 years old for continued employment, I would like to proceed with this matter to secure employment opportunities for the elderly until they reach 70 years of age and allow various options so as to accommodate their preferences and characteristics.
I would also like to proceed with this matter to determine the overall policy direction on the details of the system with the action plan to be approved by next summer and submit a bill to the Diet as soon as possible after deliberations at the Labor Policy Council. I would like the relevant ministers including Minister Motegi and Minister Nemoto to advance the necessary reviews with this goal in mind.
With regard to expanding hiring experienced workers, or mid-career recruitment, and reviewing the traditional recruiting practice of periodically hiring fresh college graduates, we need companies to reconsider their evaluation and remuneration systems. In addition to the Government’s request to major corporations to disclose information about the ratio of mid-career recruitment, I will personally take the lead in establishing a council inviting major corporations that are dedicated to expanding mid-career hires, with the aim of further catalyzing this movement. While working on this, I would also like to deal with various issues, including the impacts to small and medium-size enterprises caused by the expansion of mid-career recruitment by major corporations, regarding which various views were proposed. Therefore, I ask for the cooperation and support of the business community.
Furthermore, with regard to the prevention of diseases, we will consider enhancing significantly the incentives for insurers by reviewing the current scheme to support the self-initiated efforts of insurers under the National Health Insurance System and the arrangement to adjust financial support for the latter-stage elderly by Health Insurance Societies. In the area of preventative nursing care, we aim to strengthen incentive measures for nursing care business operators and others. We have been discussing these two topics for quite some time now. 20 years ago, I was involved with the work of the Social Policy Division of the Liberal Democratic Party (LDP) and compiled a series of recommendations. Things, however, remain unchanged even now. At long last, we are close to actually realizing these proposals. I believe this is something we must accomplish and I ask the relevant ministers to continue advancing reviews with a view to compiling the interim report at the end of the year.”
Ministerial Council on the Monthly Economic Report and Other Relative Issues
Cabinet Secretariat, Tuesday, October 23, 2018
[Provisional Translation]
On October 23, 2018, Prime Minister Shinzo Abe attended a meeting of the Ministerial Council on the Monthly Economic Report and Other Relative Issues at the Prime Minister’s Office.
Regarding the assessment of the current state of the Japanese economy, the October Monthly Economic Report states, “The Japanese economy is recovering at a moderate pace. ” Furthermore, in regard to short-term prospects, the Report states, “The economy is expected to continue recovering, supported by the effects of the policies, while employment and income situation is improving. However, attention should be given to the effects of situations over trade issues on the world economy, the uncertainty in overseas economies and the effects of fluctuations in the financial and capital markets. Furthermore, sufficient attention should be given to the economic impacts by the successive natural disasters. ”
Council on National Strategic Special Zones
Cabinet Secretariat, Tuesday, October 23, 2018
[Provisional Translation]
On October 23, 2018, Prime Minister Shinzo Abe held the 36th meeting of the Council on National Strategic Special Zones at the Prime Minister's Office.
At the meeting, a discussion was held on the certification of special zone plans, the restart for the national strategic special zones initiative, and the promotion of the Super City Initiative.
Based on the discussion, the Prime Minister said,
“We will advance reforms by breaking down regulations and institutions that are rigid like bedrock. Regulatory reform will continue to be the main engine for the growth strategy of the Abe Cabinet, and national strategic special zones offer a breakthrough in this endeavor.
In particular, as the fourth industrial revolution is rapidly expanding around the world, we need to promote innovation by boldly reviewing the regulations and institutions that do not fit into this era.
The Cabinet will exert its efforts, working in unity, to eliminate the governance gaps.
In this regard, I would like to ask Minister Katayama and private sector members of this Council to take firm steps towards further bolstering the national strategic special zone system, including swiftly compiling the basic concept of the Super City Initiative and implementing other proposals made by private sector members today.”
Policy Speech by Prime Minister Shinzo Abe to the 197th Session of the Diet
Cabinet Secretariat, Wednesday, October 24, 2018
[Provisional Translation]
On October 24, 2018, Prime Minister Shinzo Abe delivered a policy speech to the 197th Session of the Diet during the plenary sessions of the House of Representatives and the House of Councillors.
The Japan-EU High Level Industrial, Trade and Economic Dialogue
Foreign Affairs, Monday, October 22, 2018
1. On October 22, 2018, the Japan-EU High Level Industrial, Trade and Economic Dialogue was held in Tokyo.
2. From the Japanese side, Mr. Taro Kono, Minister for Foreign affairs, Mr. Hiroshige Seko, Minister for Economy, Trade and Industry, and officials from relevant ministries, and from the EU side, Mr. Jyrki Katainen, Vice-President of the European Commission for Jobs, Growth, Investment and Competitiveness and other officials participated in the Dialogue.
3. In the Dialogue, both sides held fruitful discussions on various challenges Japan and the EU face in the field of global trade, energy, environment, investment and digital economy among others. They confirmed the importance of their continued cooperation in addressing these challenges.
4. A Joint Press Release as issued following the Dialogue.
The Japan-EU High Level Industrial, Trade and Economic Dialogue between Mr. Taro Kono, Minister for Foreign affairs, Mr. Hiroshige Seko, Minister for Economy, Trade and Industry as co-chairs on the Japanese side, and Mr. Jyrki Katainen, Vice-President of the European Commission for Jobs, Growth, Investment and Competitiveness as a co-chair on the EU side, which is a channel to hold a strategic discussion on a range of topics on industry, trade and economy in close cooperation with relevant Ministries and agencies, was established on the occasion of the 25th Japan-EU Summit held in July 2018.
Tax Agreement with Croatia was Signed
Ministry of Finance, Friday, October 19, 2018
[Provisional translation]
1. Today, the Government of Japan and the Government of the Republic of Croatia signed the Agreement between Japan and the Republic of Croatia for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance in Zagreb. This Agreement is the first tax agreement to be concluded between Japan and the Republic of Croatia in light of an increasingly close economic relationship between the two countries.
2. For the purpose of eliminating double taxation arising between the two countries, this Agreement clarifies the scope of taxable income in the two countries. In addition, this Agreement will enable the tax authorities of the two countries to consult each other on taxation not in accordance with the provisions of this Agreement, to exchange information concerning tax matters and to mutually lend assistance in the collection of tax claims. It is expected that, while eliminating double taxation and preventing international tax evasion and tax avoidance, this Agreement promotes further mutual investments and economic exchanges between the two countries.
Next Steps
After the completion of the necessary domestic procedures in each of the two countries (in the case of Japan, approval by the Diet is necessary), each of the two countries shall send through diplomatic channels to the other country the notification confirming the completion of its internal procedures. This Agreement will enter into force on the thirtieth day after the date of receipt of the latter notification and will have effect:
(a) with respect to taxes levied on the basis of a taxable year, for taxes for any taxable years beginning on or after
January 1 in the calendar year next following that in which this Agreement enters into force; and
(b) with respect to taxes levied not on the basis of a taxable year, for taxes levied on or after January 1 in the
calendar year next following that in which this Agreement enters into force.
(c) The provisions concerning the exchange of information and the assistance in the collection of taxes have effect
from the date of entry into force of this Agreement without regard to the date on which the taxes are levied
or the taxable year to which the taxes relate.
Financial System Report (Oct. 2018)
Bank of Japan, Monday, October 22, 2018
Features of and motivations behind the October 2018 issue of the Report
It has become increasingly important to accurately assess financial vulnerabilities amid the prolonged low interest rate environment. Active financial intermediation -- particularly bank lending -- has contributed to an improvement in the real economy. However, if excessive risk taking spreads across financial intermediation activities, the real economy could undergo significant adjustment pressure in the future. Furthermore, when the real economy deteriorates considerably -- in other words, when a tail risk materializes -- unless financial institutions have sufficient stress resilience, they could face difficulty in maintaining their financial intermediation function, which could in turn exacerbate the real economy through a negative feedback loop.
Motivated by the above considerations, this October 2018 issue of the Report is concerned most with the following three areas of analysis. First, we quantitatively assess the tail risk in terms of deterioration in the real economy from a macroprudential perspective. Specifically, we use a new analytical approach called "GDP-at-risk" (GaR) to visualize the downward risks to the economy caused by financial vulnerabilities. Second, we refine the measurement of financial institutions' risk profiles, such as the amount of risk and the heterogeneity among these institutions, to take into account the recent behavior of financial institutions' risk taking and risk management. In particular, this issue of the Report focuses on two aspects: (1) in terms of credit risk, the actual conditions of lending to middle-risk firms and overseas lending, the two types of lending in which financial institutions have increased their risk taking in recent years; and (2) in terms of market risk, the effects of an increasing realization of gains from the sale of securities, as well as the effects of a growing exposure to stock investment trusts. Third, we conduct a more detailed analysis of financial institutions' stress resilience to tail risks, by incorporating the effects of financial institutions' recent risk taking into the Financial Macro-econometric Model (FMM). The FMM measures credit costs by taking into account the tendency that, when the real economy deteriorates, default rates of middle-risk firms increase in a nonlinear manner to a greater degree than those of financially sound firms.
Executive summary
Developments in financial intermediation
Domestic financial intermediation -- particularly bank lending -- has continued to be active and supported a moderate expansion of Japan's economy on the back of monetary easing by the Bank of Japan. In the domestic loan market, the interest rates for both short-term and long-term loans have been hovering around historically low levels and loans outstanding have continued to grow at a year-on-year rate of around 2 percent. Business fixed investment-related lending to small firms in particular has increased across a wide range of industries as lending competition has intensified among regional financial institutions. In the CP and corporate bond market, an increasing trend in large firms' fund-raising for working capital, refinancing, and M&A deals has continued as issuance rates have hovered at extremely low levels.
Financial institutions have maintained the upward momentum of their overseas investment and lending activities, reflecting the continued steady growth of the global economy. Institutional investors such as life insurance companies have also increased their overseas exposure.
Financial cycle and potential vulnerabilities
The funding conditions for firms and households have been highly accommodative, but the financial cycle has shown no signs of overheating as observed during the bubble period in the late 1980s. Financial institutions have maintained their active lending attitudes amid the prolonged favorable macroeconomic environment backed by economic expansion and low interest rates. The expansionary phase of the financial cycle has continued as the total credit to GDP ratio has increased with a relatively large deviation from the long-term trend, reflecting an increase in lending to middle-risk firms and the real estate sector. These financial developments have supported the economic expansion to date and also suppressed downside risk to the real economy in the near future. However, from a somewhat longer-term perspective, if the growth potential of Japan's economy does not increase, then the recent financial developments could build up pressure on balance sheet adjustments and thereby amplify downward pressure on the economy in the event of a future negative shock. This is because, if financial institutions and borrowers were to base their behaviors on overly optimistic projections, then they could suffer unexpected losses in the event of a deterioration of the macroeconomic environment.
International financial conditions have featured a prolonged period of increasing global debt outstanding and investors' search for yield. The portfolio quality of Japanese financial institutions' overseas loans has remained high on the whole, but some financial institutions have increased lending to relatively high-risk firms, driven by intensified competition with overseas financial institutions and higher foreign currency funding costs. With regard to securities investment, Japanese financial institutions have maintained a relatively high level of overseas exposure from a somewhat longer-term perspective. Therefore, continued attention should be paid to whether policy rate hikes in the United States, international trade tensions, and a rise in geopolitical uncertainties particularly over emerging market economies could affect Japan's financial markets and financial institutions through capital outflows from emerging markets and a widespread repricing of risky assets.
Stability of the financial system
Financial institutions generally have strong resilience in terms of both capital and liquidity during tail events such as the failure of Lehman Brothers (the Lehman shock). Thus, it can be judged that Japan's financial system has been maintaining stability on the whole. However, financial institutions' core profitability has continued to decrease amid the persistent decline in the population and the number of firms as well as the prolonged low interest rate environment. Under these circumstances, regional financial institutions' capital adequacy ratios have gradually decreased because the pace of increase in financial institutions' capital has not necessarily kept up with the pace of increase in the amount of risk assets. Stress testing results in this Report indicate that financial institutions are able to maintain their capital above regulatory requirement levels even under a stress situation, as was the case for the tests conducted in previous issues of the Report. However, financial institutions tend to become more cautious in their risk taking if their capital adequacy ratios fall substantially or they continue to register net losses. Therefore, it should be noted that in the event of stress, downward pressure on the real economy from the financial system would be more likely to intensify than in the past. Financial institutions have significant heterogeneity in their loss-absorbing capacity, and those that have actively engaged in risk taking relative to their loss-absorbing capacity, in areas such as lending to middle-risk firms and the real estate sector, as well as securities investment, could experience larger declines in their capital because of credit costs and losses on securities.
Challenges from a macroprudential perspective
In order for the financial system to maintain stability into the future, financial institutions need to raise their core profitability. At the same time, the corporate sector needs to increase medium- to long-term growth expectations, which is the other side of the same coin. To this end, financial institutions' consulting and advisory services for firms are important, in addition to firms' own efforts to improve productivity and the government's initiatives to increase the economy's growth potential. Financial institutions have already been making such efforts, but it will likely take more time until they bear fruit in the form of an increase in financial institutions' profitability. It is therefore necessary for financial institutions to increase their non-interest income such as fees and commissions and drastically raise their business efficiency, as well as to improve the profitability of their loans.
Financial institutions also need to enhance their risk management in areas where they have increased their risk taking, such as lending to middle-risk firms, real estate lending, overseas lending, and securities investment. In particular, financial institutions have been increasing the amount of loans to low-return borrowers whose borrowing interest rates are low relative to their credit risk through the business cycle. It is thus increasingly important for financial institutions to examine whether their loan-loss provisions are appropriate and set their loan interest rates commensurate with the risks involved while taking into account possible future developments in the macroeconomic environment. In addition, in order to ensure sufficient loss-absorbing capacity, financial institutions need to examine whether their policies on capital and profit distribution including dividends, and their strategies for utilizing unrealized gains on securities are appropriate in terms of their stress resilience. The Bank of Japan will support such efforts by financial institutions through on-site examinations and off-site monitoring, and will also continue to closely monitor the impact on the financial system of financial institutions' various forms of risk taking from a macroprudential perspective. Based on the results of the macro stress testing for individual financial institutions outlined in this Report, among other information, the Bank intends to increase its dialogue with financial institutions in order to promote a deeper common understanding with regard to resilience to stress.
Notice
This Report basically uses data available as at end-September 2018.
Please contact the Financial System and Bank Examination Department at the e-mail address below to request permission in advance when reproducing or copying the contents of this Report for commercial purposes.
Please credit the source when quoting, reproducing, or copying the contents of this Report for non-commercial purposes.
For details of the stress scenario in the macro stress testing, please see the scenario table.
Termination of Operations by Japan Disaster Relief (JDR) Team (Japan Self-Defense Force Units) to the Earthquake and Tsunami Disaster in the Republic of Indonesia
Foreign Affairs, Thursday, October 25, 2018
1. With regard to the Earthquake and Tsunami Disaster, which occurred on September 28, in Sulawesi, the Republic of Indonesia, the Government of Japan dispatched the Japan Disaster Relief (JDR) Team (Japan Self-Defense Force Units) and provided the assistance in transporting relief goods, displaced persons and aid persons.
2. After coordination with the Government of Indonesia, the Government of Japan decided to terminate the operations of the JDR Team (Japan Self-Defense Force Units) on October 26. The government of Indonesia highly evaluated and expressed its gratitude for the operations conducted by Japan Self-Defense Forces.
3. The Government of Japan will keep providing effective assistance to the affected areas in a seamless manner for their rehabilitation and reconstruction to the maximum extent possible.
[Reference] Japan Disaster Relief (JDR) Team (Japan Self-Defense Force Units)
October 3, the Government of Japan had decided to dispatch approximately 70 Self-Defense Force members as the Japan Disaster Relief (JDR) Team to the Republic of Indonesia, and airlift goods including emergency relief goods (Tent, Water Purifier and Generator) through the Japan International Cooperation Agency (JICA), displaced and aid persons approximately 400 persons.
