Japan has a universal public pension system. Social security spending is a key fiscal policy challenge in Japan. The 2004 pension reforms have increased the ratio of the government subsidy to the basic pension benefit. Three reform measures are necessary to improve pension finances: an increase in pension eligibility age, a reduction in the pension benefit, and an increase in contributions. Eliminating the preferential tax treatments of pension income and collecting pension contributions from dependent spouses could contribute to fiscal savings.

Abstract

Japan has a universal public pension system. Social security spending is a key fiscal policy challenge in Japan. The 2004 pension reforms have increased the ratio of the government subsidy to the basic pension benefit. Three reform measures are necessary to improve pension finances: an increase in pension eligibility age, a reduction in the pension benefit, and an increase in contributions. Eliminating the preferential tax treatments of pension income and collecting pension contributions from dependent spouses could contribute to fiscal savings.

III. Financial Policies to Support Growth1

1. Overall credit conditions in Japan have been accommodative but credit growth has remained weak, especially for SMEs and startups. In part, this is because of the persistent structural weaknesses of SMEs, with highly indebted and nonviable firms having been sheltered by public credit support measures. Regulatory barriers and the lack of market development have also played a role, including by adding to the costs of starting a business and limiting the types of credit available. Other reasons for slow credit growth include weak economic growth in recent years, coupled with an aging population, and a desire by firms to deleverage following the global financial crisis.

2. The financial needs of the private sector are also changing, as the population ages and as more firms expand their operations overseas, especially in Asia. Household demand for age-related savings and insurance will increase, while firms’ financial needs for their operations will likely be more diverse. Banks are also adjusting their business models to improve core profitability by expanding overseas and lending to regions outside their home prefectures.

3. To support growth, financial policies need to address the impediments to credit growth and meet the financial needs of the private sector. This paper argues that to encourage the supply of risk-based capital, costly government support measures should be phased out and the capital base of smaller regional banks be strengthened to foster consolidation and accelerate SME restructuring. At the same time, efforts are needed to deepen capital markets to improve the availability of risk capital and address regulatory barriers to starting businesses. It will also be important to continue to monitor closely the cross-border financial services as firms expand abroad and households invest overseas.

4. The paper is organized as follows. It first discusses the reasons behind weak credit growth, slow progress on SME restructuring and limited access to risk capital, before discussing some policy options to resolve these problems. The paper also discusses the changing financial needs of the private sector in the financial system and their implications for policy.

A. Why is Credit Growth Weak?

5. Credit growth remains weak, even though banks’ lending attitudes and corporate bond markets have largely bounced back from the low points following the Lehman crisis. The BoJ Tankan survey of firms’ perception suggests that financial institutions have improved their lending attitudes and credit availability for all categories of companies (Figure III.1). By late 2011, the diffusion index had recovered to positive territory for the first time since the Lehman crisis in late 2008, but bank’s attitudes to larger firms have recovered more than those for small firms. In addition, banks have plenty of liquidity to lend, with loan-to-deposit ratios at historical lows (below 70 percent) and the lowest among advanced countries. Funding conditions in debt market have also been favorable as bond spreads returned to pre-crisis levels (less than ½ percent for AA-rated debt). Credit growth has been recovering, but barely grew in early 2012 for large corporations while credit to SMEs fell by 1 percent y/y. The Tankan survey diffusion index on credit demand by firms and households has improved since the earthquake but remained fairly weak.

Figure III.1.
Figure III.1.

Japan: Credit Conditions

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

6. Several factors have contributed to weak credit growth despite accommodative financing conditions. These include relatively weak economic growth, deleveraging following the crisis, and structural weaknesses of SMEs.

  • Macroeconomic conditions. Weak growth prospects have deterred firms from borrowing for capital investment, while lingering deflation limited the decline of real interest rates compared with other countries, thereby not providing much stimulus to credit demand (Figure III.2). Structural factors such as population aging and the shrinking rural economy (serviced mainly by regional banks) have also contributed to weak credit demand.

Figure III.2.
Figure III.2.

Japan: Factors Contributing to Weak Credit Growth

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

  • Firms deleveraging. Firms have scaled back their capital investment and shifted towards internal financing. Internal financing (through retained earnings and depreciation) increased from 60 percent of external financing to 150 percent during FY2008–FY2010, in part reflecting a wish to further deleverage following the global financial crisis, similar to firms in other advanced countries.

  • Household deleveraging. Household liabilities as percent of disposable income have continued to decline steadily over the past decade. By 2009, the level had reached about 125 percent of disposable income. This is about the level of U.S. household debt to income and higher than in many European countries, but household net worth remains the highest among G-7 countries. The steady decline in household debt partly reflects population aging, with a decline in household formation. While total liabilities to income have fallen, demand for housing loans from banks has risen slightly, partly because of reconstruction after the earthquake. Moreover, bank credit filled a gap left by the scaling back of the Japan Housing Finance Agency’s (JHF) direct retail mortgages lending. However, overall building activity remains well below pre-crisis levels. Consumer credit (primarily credit cards and consumer loans) has contracted sharply since the crisis due to deteriorating income prospects, along with a tightening of regulation to protect consumers and curb excessive lending in recent years.

7. Slow credit growth to SMEs reflects their structural problems of high leverage and low profitability. SMEs have been deleveraging, particularly for nonmanufacturing SMEs, but they still have high debt (at 250–300 percent of equity; 2½ times higher than large firms) and loans to SMEs still account for about half of the bank credit (Table III.1). Moreover, they have lower net profit margin (adjusted by firms’ capital ratio) at about 1½ percent than large firms, and far below the average of 8 percent for other advanced economies (Tokuda 2011). In addition, those SMEs with credit guarantees tend to take longer to repay current debt and are more likely to incur losses (text charts).

Table III.1.

Summary Statistics of the Corporate Sector—By Industry and Capital Size

article image
Sources: Ministry of Finance and staff estimates.

by size of capital, which provides a proxy for firm size.

Averages from 2000 by sector and size of capital.

Net profit margin adjusted by the capital ratio relative to its sectoral mean.

Value-added per employee

uA03fig01

Japan: Interest Coverage Ratio for SMEs

(in number of times)

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

Source: Bank of Japan
uA03fig02

Operating Performance and Debt Repayment Capacity among SMEs with and without Credit Guarantees

(in percent)

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

Source: CRD.1/ Repayment capacity is measured in terms of number of years, which is the ratio of all long- and short-term debts divided by the sum of net income and depreciation expenses. SMEs in operating losses or longer years have weaker repayment capacity on debts.

8. Borrowing costs, however, do not vary much despite the wide variation of firm performance among SMEs. The difference in borrowing costs between the lowest and highest risk deciles is only about 100 basis points and appears small compared with the large differences in operating performance between these groups (Table III.2). This may reflect the government credit support measures that limited the degree to which borrowing costs reflected underlying credit risks.

Table III.2.

SMEs’ Performance and Soundness, by Risk Ratings

article image
Source: CRD.

Negative debt equity ratios and interest rate coverage indicates negative equity and net losses.

in percent.

Repayment capacity is defined as a ratio of the sum of net income and depreciation to debt level.

Lower risk rating number indicates higher creditworthiness.

9. Despite their structural weaknesses, there have been only limited exits or restructuring of nonviable SMEs. The entry and exit of SMEs is also low at about one-third of that in other advanced countries. Japan has made efforts to improve corporate restructuring through reforms of insolvency laws.2 About 7,000 SMEs (less than 1 percent of total SMEs) have applied for business rehabilitation during 2000–09 under the new procedures but only 40 percent of those have achieved rehabilitation (Figure III.3).

Figure III.3.
Figure III.3.

Japan: Slow SME Restructuring

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

B. Why Have SMEs Been Slow to Restructure?

10. Creditors and nonviable SMEs have little incentive to restructure loans. The size of individual SME loans is usually too small for banks to justify restructuring on a case-bycase basis. In addition, recognizing the losses would hit profit and capital, especially for smaller regional/shinkin banks that generally lack expertise, face higher nonperforming loan ratios (4-6 percent relative to 2 percent among major banks), and may not be in a strong capital position (Watanabe 2012).3 More than half the larger (tier 1) regional banks and most small (tier 2) regional banks have capital adequacy ratios below that of the major banks (text figure).4 The existence of multiple creditors and the wide use of personal guarantees by SMEs adds to the difficulties in voluntary workouts or business transfers. Moreover, bankruptcy carries a high social stigma in Japan.

uA03fig03

Distribution of Selected Bank’s Capital Adequacy and Loan Ratio

(Capital adequacy ratio; in percent)

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

Source: Japanese Bankers Association

11. Several public credit support measures could also have weakened credit risk assessment and reduced the incentives to restructure. The measures were put in place after the global financial crisis and the Great East Earthquake, including an expansion of public credit guarantees, safety-net lending by government-affiliated financial institutions (GFIs), and temporary SME Financing Facilitation that was accompanied by a revision of the FSA’s inspection manual and supervisory guidelines to relax the requirement of classifying restructured loans under the ‘normal’ category (Table III. 3).5 As a result, the size of public guarantees increased from about 4 to 6 percent of GDP over the past four years. These measures helped shelter existing firms from tighter credit conditions and limited the number of bankruptcies. Nonviable firms, however, were able to find support from low-cost credit that limited the pressure on them to enter bankruptcy and restructuring. The costs of these measures, however, have begun to outweigh the benefits, including by:

Table III.3.

Government Credit Guarantee Schemes

article image
Source: SME Agency, METI.
  • Weakening credit risk assessment. Banks have less incentive to assess and take on credit risk under the support measures, as the guarantees covered a large share of the loan, in some cases up to 100 percent of the credit (Arping, Loranth, and Morrison 2010, and Uesugi, 2010). Over half of the SMEs that received some support (e.g., loan modification) noted in a survey that this would have a negative impact on their ability to obtain new borrowing, suggesting that the guarantees are not very effective in helping SMEs build their creditworthiness.

uA03fig04

Government’s Role on SME Credit Guarantee Program

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

Source: National Credit Guarantees Corporations
  • Understating credit risk. Relaxing the requirement of restructured loans to be classified as “normal” under the revision of guidelines and the SME Financing Facilitation Act could lead to an understatement of the true credit risk that banks face. According to the BOJ, banks’ NPL ratio would rise by about 1 percentage point if firms with restructured loans failed to recover. A previous special guarantee program in the late 1990s and early 2000s cost government about ¥2 trillion (½ percent of GDP), large relative to the total credit guaranteed of ¥40 trillion.

  • Reducing nonguaranteed loans and limiting incentives to restructure SMEs. Keeping nonviable SMEs afloat through credit support measures could reduce credit supply for startups. The continued availability of credit support at low cost has cushioned nonviable SMEs from exits or restructuring as they face little pressures to restructure. Moreover, creditors are able to rollover guaranteed loans with borrowers without requiring business improvements that would be needed in case of restructuring.6

C. Why is the Availability of Risk-Based Capital Limited?

12. Availability of risk-based capital is very limited despite plenty of liquidity. Startups rely predominantly on self-finance, but the median value of funds raised from this source is small relative to other financing sources (Figure III.4). Although venture capital financing is able to raise sizeable funds, its availability is limited. Japan ranks second to last in venture capital investment as a share of GDP among the OECD. Business transfer rates, initial public offerings, and securitization of SME loans are also low by international standards.

Figure III.4.
Figure III.4.

Limited Availability of Risk-based Capital and Business Transfers

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

13. Several regulatory and institutional barriers contribute to the limited availability of risk-based capital, including:

  • Regulatory barriers. Difficulties in starting a business contribute to the low business startup rate in Japan (World Bank, 2012). Japan ranks relatively low among other G-7 countries and Asia’s industrialized economies in the ease of starting a business, particularly related to the time required and fees charged in business registration (Figure III.5). While Japan ranks better than average in the overall ease of doing business and access to credit, it is below a number of Asia-Pacific economies.

Figure III.5.
Figure III.5.

Japan: Market Practices and Regulatory Factors that Limit Risk-based Capital

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

  • The lack of timely credit information. While several credit registries are available, over half of surveyed financial institutions consider that assessing SME credit risks remains challenging due to limited information and untimely disclosure.7 Financial institutions often do not share credit information through credit registries, partly because of legal constraints and lack of a unique identification system in the absence of a tax identification number. These likely contributed to a financing gap for the ‘middle-risk’ group as large banks service high credit-worthy customers and lending companies engage in high-risk unsecured lending, but leave out the middle-risk group (Schaede 2005).

  • Public pension funds have been restricted from investing in riskier assets. Japan’s public pension funds differ from some other advanced countries in that regard, with a much higher share of assets in government bonds and no exposure to property or alternative investments (text figure).

uA03fig05

Asset allocation of Public Pension Reserve Fund

(In percent of total investment, 2006)

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

Sources: OECD1/ means private equity for Canada and Ireland, and various alternative asset classes for New Zealand

14. Market practices such as banks’ preference for fixed-asset collateral and personal guarantees in lending also tend to limit risk-based financing. Banks’ lending decisions typically depend on collateral availability (often in fixed assets) and personal guarantees (unlimited liability subject to a maximum amount and duration) (Shirota, Imakubo, and Nishioka 2011).8 While these are common practices across countries, it appears that it is more prevalent in Japan given its larger reliance on bank finance, and relatively less use of asset-based lending. Moreover, claims with personal guarantees are not easily transferable due to legal provisions. More than a quarter of SMEs consider the use of personal guarantees to be an obstacle to business transfers.

15. While efforts have been made to promote risk-based financing, it has not been widely used by financial institutions. The GFIs and BOJ have begun to promote asset-based lending (ABL) but many financial institutions—particularly smaller regional/shinkin banks—have limited expertise in ABL (Figure III.5).9 Financing based on account receivables is well established because nominal claims are easy to recognize but face the challenge of double assignment of the same claims. Difficulty in assessing a fair value has limited the availability of inventory-based and current-asset based financing (JSBRI 2011). Smaller banks, in particular, do not have the expertise to assess the fair value of certain type of collateral such as inventory and intangible assets. The launch of the Act on Electronically Recorded Monetary Claims (ERMC) in FY2007 could help stipulate rights on claims and avoid the risk of double assignment of claims, and thereby lift banks’ lending to SMEs. However, the development of this system is at an early stage and banks need to incur a sizeable investment and operating cost to make use of it.

16. Risk appetite in the financial system is tepid. In Japan, household financial assets are about five times disposable income, the highest among the OECD. However, these financial assets are held in cash and deposits with financial institutions, who in turn allocate most of their assets to government securities (text charts). The low risk appetite largely reflects social preference in an aging society, risk-averse corporate governance, and weak economic conditions at present.

uA03fig06

Household Asset Allocation

in proportion by type of assets

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

Source: OECD.1/ Average across 2003-2010, where data are available.
uA03fig07

Household Financial Asset Allocation Across Age Groups

(in millions of yen)

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

Source: National Survey of Family Income and Expenditure-2009 and Hasegawa and Lam (2011).

17. The government’s role in the financial system could play a role in the risk aversion. For instance, Japan Post Bank and Insurance, which accounts for more than 10 percent of total financial sector assets, channels considerable private savings to investment securities, mostly Japanese Government Bonds. In addition, several public financial institutions do not operate on an even-playing field with private financial institutions, as several are not subject to corporate tax and capital requirements. Inspections of GFIs by the Financial Services Agency are infrequent, taking place about once every 2–3 years.

18. The full privatization of Japan Post would create a level playing field and help channel private savings with a better balance between risk and return. However, full privatization of Japan Post has been delayed, as has privatization of some other GFIs that provide credit (e.g., Shoku-Chukin bank and Development Bank of Japan). Delays of the GFI reforms could complicate their business strategies, e.g., Japan Post Insurance may not be able to underwrite health-care policies.

D. Policy Options to Support Credit Growth

19. The factors contributing to slow credit growth in Japan are complicated and no single reform will provide a silver bullet to jump start credit growth. Appropriate macroeconomic policies, together with reforms to open up protected sectors, including some service sectors and agriculture, would help boost growth (discussed in Chapter 2). In the financial sector, a number of policy measures could help foster a more dynamic financial sector, as follows:

  • Gradually phase out credit support measures. Special credit guarantees with full coverage of the loan value need to be phased out as the recovery takes hold. Over time, reducing the normal guarantee coverage ratio from 80 to 60 percent in line with international averages (IMF, 2006) and scrutinizing the rollover of guarantees would ensure market discipline in monitoring credit risk by banks. Moreover, the temporary SME Financing Facilitation Act should also be phased out by March 2013, such that banks would not have an obligation (but still retain the option) to restructure loans at the request of SMEs. This would help limit restructured loans being reclassified as ‘normal.’

  • Advance GFIs reform. Efforts are needed to reduce the government’s role in ownership of financial institutions and to ensure a level-playing field. Reform should involve full privatization plans for many GFIs (including Japan Post), which may help increase the availability of risk capital to the private sector. More frequent inspections by the FSA and more transparent and accountable governance for GFIs are also needed to maintain financial stability and limit contingent fiscal risks.

  • Encourage consolidation of regional and shinkin banks with low profitability by raising their capital requirements. Increasing the capital requirement for domestic-oriented banks from 4 percent at present would facilitate consolidation. For instance, less than 5 percent of smaller banks would have a capital shortfall if the capital requirement for those banks was raised to 6 percent of risk-weighted assets (still below the minimum requirement of internationally-active banks at 8 percent). This may risk, in the near term, a contraction in credit as regional banks deleverage to meet the capital requirement, but the contraction could largely be mitigated by bringing in new capital through equity issuance, lower dividend payouts, or a temporary public capital injection. Over the medium term, higher capital would put these institutions in a stronger financial position to take on risk.

  • Accelerate SME restructuring. Consideration could be given to refocusing the public asset management company to advance SME restructuring. This would encourage the restructuring and exit of nonviable SMEs by using debt-equity swaps to incentivize banks and SMEs under out-of-court voluntary workouts (Laryea 2010). Based on simulations with the IMF’s Global Integrated Monetary and Fiscal (GIMF) model, addressing SME structural weaknesses could raise aggregate productivity by about ¼ percentage points, which in turn would lift long-term growth by 0.1–0.2 percentage points from the baseline.10

  • Promote risk based financing by encouraging use of asset-based lending and deepening capital market developments. The authorities (government and municipalities) could take the lead in originating and trading electronically-registered claims for firms and households, which could avoid the risks of double assignment of claims. Current support to SMEs should be scaled down and better targeted by redirecting GFIs’ lending away from reinsuring SME guarantees toward risk-based lending, as studies show startups obtaining GFIs’ financing tend to outperform (Fukanuma, and Tadanobu, and Watanabe 2006). Capital markets for securitized loans could be developed further by revising the investment restrictions for institutional investors (e.g., pension funds)—once the supervision and regulatory framework is strengthened—to encourage alternative investments such as securitized loans and venture capital. This could improve long-term returns and help channel funds towards private investment, eventually lifting growth.

  • Streamline regulatory measures to reduce the time and cost of starting businesses, particularly for business registration, which could promote business creation and transfers. Consideration could be given to broadening the coverage of credit registries through a more centralized database, and including a consumer data bureau for personal credit information. This could be facilitated by linking the proposed taxpayer identification system to the identification of credit information of firms and individuals

E. Changing Financial Needs of the Private Sector

20. As the population ages and firms continue to expand overseas, their financial needs would likely become more diverse. Financial institutions will therefore need to adjust their business models accordingly.

Households’ Needs

21. As the population ages, demand for ageing-related savings and insurance products would likely increase. Household financial assets are sizeable (nearly ¥1,500 trillion or over 3 times of GDP) and over half are held in cash and deposits as risk appetite is low in general. Household savings have begun to shift to new financial products in pursuit of higher returns, but these only comprise about 5 percent of total financial assets. Retail financial innovation such as investment trust (toushin funds) and health-care life insurance products has been introduced to meet such demand. Estimates suggest that age and cohort effects are statistically significant in determining financial asset allocation. For example, younger households tend to hold 5-10 percent less in deposits while younger cohorts save 5-8 percent more in life insurance products than earlier cohorts.

uA03fig08

Number of ETF and ETN

(Those listed on Tokyo Stock Exchange)

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

Sources: Tokyo Stock Exchange1/ In number of issues. ETF and ETN refers to exchange-traded funds and exchange-traded notes.

Corporate Sector Expanding Overseas

22. As firms expand overseas, they would likely shift towards more diverse financing and transactional needs. In that regard, banks could meet the rising demand by expanding overseas and fostering relationship banking (e.g., FX funding and syndicated services). Large firms may seek syndicated loans or project finance. In addition to large corporations, SMEs are also seeking overseas affiliation for markets and supplies and nearly 40 percent of surveyed SMEs consider cross-border financing and settlement are key challenges in developing overseas affiliation. In this regard, the Financial System Council (2009) recognized benefits of a more diverse financing base.

Banks’ Business Models

23. Banks are adjusting their business models to meet the changing needs of clients but so far have had modest success in enhancing core profitability. As domestic credit demand remains sluggish, major banks are increasingly expanding overseas, with these assets rising from about ¥20 trillion to about ¥33 trillion (adjusted for FX) during September 2007-2011, mostly in the Asian region. The net interest margin for overseas lending (about 1–3 percent varying across types of lending) is, however, just slightly above the domestic margin due to intense competition with local banks and higher funding cost overseas. Ongoing deleveraging by European banks has provided takeover opportunities and major banks and insurers have been taking a selective approach focusing on syndicated finance and promising markets.

uA03fig09

Consolidated foreign claims of Japanese banks

(in billions of U.S. dollars)

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

Source: Bank of JapanNote: On ultimate risk basis. Asia and Pacific includes Australia, Hong Kong SAR, New Zealand and Singapore.
uA03fig10

Sources of Income in Overall Banking Sector

(in billions of yen; as of end-March)

Citation: IMF Staff Country Reports 2012, 209; 10.5089/9781475506341.002.A003

Source: Bank of Japan, CEIC.

24. What are the Implications of Changing Financial Needs on Policies?

  • Retail financial innovation could be further enhanced. Current regulations have room to improve on the licensing and distribution of insurance products, according to the Detailed Assessment Report in the FSAP Update.11 In parallel, policies should strengthen consumer protection and household financial literacy.

  • Further efforts are needed to deepen capital markets. Government initiatives on a ‘two-track’ financial system—a balance between banks and the capital market for channeling credit and sharing risk—have had limited success. The FSAP Update considered that reforms to the financial tax, legal and regulatory framework (e.g., by improving the resolution framework for nonbank financial institutions) would help address the key obstacles.

  • Changes to banks’ business models to improve profitability are welcome but would require close monitoring. Banks’ overseas expansion would raise new regulatory and supervisory challenges. The FSA and BOJ would need to deepen cross-border risk monitoring arrangements, for example, by making active use of Memoranda of Understanding with foreign supervisory authorities.

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1

Prepared by W. Raphael Lam (APD) and Jongsoon Shin (OAP) based on the “Japan FSAP Update: Technical Note on Credit Intermediation”. We are thankful for the assistance by Mr. Tsukada and Mr. Takahashi of the Credit Risk Database in data access. We also acknowledge the comments from seminar participants from the Bank of Japan, Financial Service Agency, Ministry of Finance, Ministry of Economy, Trade, and Industry, and the Cabinet Office.

2

Following the enactment of the Civil Rehabilitation Act in 2000, the SME Revitalization Support Councils and the Business Rehabilitation Alternative Dispute Resolution System (ADR) were established. The Corporate Reorganization Act and the Bankruptcy Act were amended to facilitate restructuring. The Industrial Revitalization Corporation of Japan (IRCJ) operated during 2003-2007 to dispose of nonperforming loans and revitalize firms with excessive debts. Private equity and consulting firms also specialize in restructuring of distressed companies.

3

Most regional and shinkin banks have capital above the minimum requirement of 4 percent of risk-weighted assets (RWA) at present. The FSAP stress tests suggest that the potential capital shortfall of small banks is small (about ¾ percent of GDP).

4

Internationally active banks are subject to a minimum capital requirement of 8 percent of their risk weighted assets, while it is 4 percent for banks with mainly domestic activity.

5

The GFIs in the note refers to financial institutions that are publicly-held and those private financial institutions that remain affiliated with the government. For a complete list of support measures, please see SME White Paper (2011).

6

At the same time, creditors decide whether to roll over the guaranteed loans considering various factors, such as the creditworthiness of borrowers.

7

Credit registries in Japan include the Credit Risk Database (CRD), Risk Data Bank of Japan (RDB), Credit Risk Information Total Services (CRITS), and shinkin data bank (SDB). Financial institutions could also get access to credit risk databases from designated credit bureaus based on the Money Lending Business Act, such as Japan Credit Information Reference Center Corp. (JICC) and Credit Information Center (CIC). There appears to be no centralized credit bureau for consumer loans, such as late payment, bankruptcy and others, are shared between banks and consumer finance under the scheme, even they are owned by these banks), leaving scope for improving efficiency through information sharing.

8

Financial institutions often request a personal guarantee in financing to SMEs. In the past, guarantors often bore indefinite unlimited joint and several liabilities under blanket guarantee contracts, placing on excessive burden on guarantors. The Act for Partial Revision of the Civil Code came into effect in 2005 to rectify this by invalidating oral agreements, mandating contracts to stipulate maximum guarantee amounts, and limiting guarantee obligations to within five years (within three years when no period is specified).

9

Various GFIs have made efforts in promoting asset-based lending since 2007. The BOJ has revised its lending facility to support growth to include asset-based lending in 2011.

10

The GIMF model is a multi-region dynamic general equilibrium model that analyzes the growth impact of an increase in productivity. If SME structural weaknesses were addressed, we would expect that the productivity of smaller firms would increase to about 80 percent of that of large firms. As a result, aggregate productivity would increase by ¼ percentage points.

11

For example, although it is clear that an insurer is licensed for either life insurance or nonlife insurance, the specific class of insurance approved is not publicly disclosed. Such information can be useful to consumers and intermediaries.

Japan: Selected Issues
Author: International Monetary Fund
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    Japan: Credit Conditions

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    Japan: Factors Contributing to Weak Credit Growth

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    Japan: Interest Coverage Ratio for SMEs

    (in number of times)

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    Operating Performance and Debt Repayment Capacity among SMEs with and without Credit Guarantees

    (in percent)

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    Japan: Slow SME Restructuring

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    Distribution of Selected Bank’s Capital Adequacy and Loan Ratio

    (Capital adequacy ratio; in percent)

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    Government’s Role on SME Credit Guarantee Program

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    Limited Availability of Risk-based Capital and Business Transfers

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    Japan: Market Practices and Regulatory Factors that Limit Risk-based Capital

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    Asset allocation of Public Pension Reserve Fund

    (In percent of total investment, 2006)

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    Household Asset Allocation

    in proportion by type of assets

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    Household Financial Asset Allocation Across Age Groups

    (in millions of yen)

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    Number of ETF and ETN

    (Those listed on Tokyo Stock Exchange)

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    Consolidated foreign claims of Japanese banks

    (in billions of U.S. dollars)

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    Sources of Income in Overall Banking Sector

    (in billions of yen; as of end-March)