Bank of Japan Working Paper Series

Broad
Perspective Broad-Perspective Review Series
Review

Counterfactual Simulation of theEffect of Large-Scale Monetary Easing
on Japan's Financial System
Nobuhiro Abe*nobuhiro.abe@boj.or.jp

Naohisa Hirakata**
naohisa.hirakata@boj.or.jp

Yuto Ishikuro***yuuto.ishikuro@boj.or.jp

Yosuke Koike*yousuke.koike-1@boj.or.jp

Yuki Konaka*yuuki.konaka@boj.or.jp

Yutaro Takano****yuutarou.takano@boj.or.jp

No.24-E-8
July 2024

Bank of Japan
2-1-1 Nihonbashi-Hongokucho, Chuo-ku, Tokyo 103-0021, Japan* Financial System and Bank Examination Department** Niigata Branch*** International Department**** Monetary Affairs Department

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Counterfactual Simulation of the Effect of Large-Scale Monetary Easing
on Japan's Financial System*
Nobuhiro Abe†, Naohisa Hirakata‡, Yuto Ishikuro§,
Yosuke Koike**, Yuki Konaka††, Yutaro Takano‡‡
July 2024
Abstract
In this paper, we use a counterfactual simulation to analyze the effect on the functionof financial intermediation in Japan of the decline in interest rates due to large-scalemonetary easing. The results show that the decline in interest rates due to large-scalemonetary easing put downward pressure on interest margins on loans and securities
investments of banks. However, capital adequacy ratios were not necessarily pushed
down significantly, because the decline in interest rates boosted the price of stocks andbonds and reduced credit risk. On the other hand, the improving real economy andlower lending interest rates increased demand from the corporate sector, leading to anincrease in loans outstanding. In addition, the improvement in corporate finances due
to an improved real economy, lower lending interest rates, and rising land and otherasset prices, reduced credit risk in lending and contributed to an increase in loans
outstanding. The results of the counterfactual simulation suggest that the decline ininterest rates due to large-scale monetary easing contributed to the facilitation offinancial intermediation.
JEL classification: E44, E59, G21, G28
Keywords: Unconventional monetary policy, financial system

The authors would like to thank the staff of the Bank of Japan for their valuable comments. The views
expressed in this paper are those of the authors and do not necessarily reflect the official view of the Bank ofJapan or of the Financial System and Bank Examination Department.
† Financial System and Bank Examination Department, Bank of Japan (nobuhiro.abe@boj.or.jp)‡ Niigata Branch, Bank of Japan (naohisa.hirakata@boj.or.jp)§ International Department, Bank of Japan (yuuto.ishikuro@boj.or.jp)** Financial System and Bank Examination Department, Bank of Japan (yousuke.koike-1@boj.or.jp)†† Financial System and Bank Examination Department, Bank of Japan (yuuki.konaka@boj.or.jp)‡‡ Monetary Affairs Department, Bank of Japan (yuutarou.takano@boj.or.jp)
*

1

1

Introduction
In Japan, the natural rate of interest has been declining, and the effect of the large-scalemonetary easing (LSME) since 2013 has been to push down long-term interest rates, resulting
in a persistently low interest rate environment. This low interest rate environment could have
had the effect of boosting the real economy by pushing up consumption, investment, and otherexpenditures by lowering real interest rates and fostering an accommodative financial
environment.1 The improvement in the real economy also had a positive effect on banks, as it
led to an increase in loans outstanding, an improvement in corporate cash flows, and a decreasein bankruptcies, all of which in turn led to a decrease in credit costs. On the other hand, when
considering the effect of LSME on the function of financial intermediation, it is important tonote that the profits of banks were pushed down because of the reduction in loan interest
margins, due to lower lending interest rates and lower market interest rates causing a decline inyields on securities.2 Thus, the effect of LSME varies depending on the economic agent andthe subject of the analysis. The effect of LSME on the function of financial intermediation of
the financial system as a whole should be considered in light of the individual effects and theirinterrelationships.
In this paper, we analyze the effect of the decline in interest rates resulting from LSME on
the profits and capital adequacy ratios of banks and on their financial intermediation from both
positive and negative perspectives. It is important to note that positive and negative factors are
two sides of the same coin in the discussion. For example, a decline in interest rates due to
LSME has the positive effect of stimulating the real economy and asset prices, and reducing
credit risk by improving corporate finances. At the same time, however, such a decline ininterest rates may reduce the interest margins on loans and investments in securities, which inturn puts downward pressure on the profits of banks. Therefore, the effect of lower interest rates
due to LSME on the function of financial intermediation is not necessarily clear in advance. A
decline in profits due to lower interest rates may contribute to downward pressure on the capital
adequacy ratios of banks, but higher stock and bond prices have an upward effect. Lower credit
risk due to improved corporate sector finances may facilitate lending transactions. These

For example, Kawamoto et al. (2021).
Bank of Japan (2024a) points out that a decline in the loss-absorbing capacity of banks may affect financial
intermediation in various ways, such as stagnation in financial intermediation and excessive behavior in the
search for yields.
122

positive and negative factors need to be considered when assessing the effect of LSME.
In order to take these various factors into account, we conduct a counterfactual simulation
analysis to understand the effect of LSME on the function of financial intermediation. We use
the financial macro-econometric model (FMM) developed at the Bank of Japan.3 Using theFMM, it is possible to grasp the effect of the decline in interest rates due to LSME by assuming
the real economy and financial markets in a counterfactual environment where there is no
LSME and interest rates do not decline, calculating the banks' profits, and comparing this to theactual value.
The following three points can be noted as results of FMM's counterfactual simulation of theeffect of LSME. (1) The decline in market interest rates due to the LSME has contributed to anincrease in loans outstanding by improving corporate finances through lower lending interest
rates, improved macroeconomic conditions, and stabilized land prices. This increase in loans
outstanding and the reduction of credit risk due to improved corporate finances boosted the
profits of banks. (2) However, the shrinking interest margins on loans due to lower lending
interest rates and declining yields on securities investment have been a negative factor in profits
to a greater extent than the increase in profits from the increase in loans outstanding and the
reduction in credit costs. (3) A decrease in risk-weighted assets due to the decline in credit risk
caused by an improvement in the macroeconomy and an improvement in valuation gains/losses
on securities holdings due to lower interest rates and higher stock prices were factors that
boosted the profits of banks and their capital adequacy ratios.
The counterfactual simulation results suggest the following points about the effect of LSME
on the function of financial intermediation. Although the decline in interest rates resulting fromthe LSME cut the interest margins on loans and securities investments of banks, it did notnecessarily lead to a significant decline in their capital adequacy ratios as a whole. In addition,
an improving economy, rising land and other asset prices, and lower interest rates on loans led
to improved corporate finances. The resulting reduction in credit risk is thought to havefacilitated smooth lending transactions between banks and corporate firms. A similar
mechanism is believed to have been at work in the increase in mortgage loans to households.
In this respect, the decline in interest rates resulting from the LSME suggests that the financial
system as a whole contributed to the facilitation of financial intermediation.43
4

For the detail of the FMM, see Abe et al. (2023).
Abadi et al. (2023) and Balloch and Koby (2023) have discussed the possibility that a decline in banks'3However, it should be noted that the counterfactual simulation results depend on theassumptions made in the analysis, the formulation of the FMM, and the estimated parameters.
For example, assumptions about the portfolio of securities may change the downward pressure
on banks' profits, which is the negative side of a decline in interest rates. Also, there areuncertainties in the parameters of the FMM function, which may affect the counterfactual
simulation results. The results in this paper are calculated mechanically under certain
assumptions, and should be viewed with some latitude. It is necessary to evaluate the functionof financial intermediation with this in mind.
(Literature review)
The following is a review of the literature relevant to the analysis in this paper. Monetary
policy reviews at foreign central banks have also addressed the relationship between monetary
policy and financial stability. In a review conducted by the Federal Reserve System for theperiod 2018-2020, Federal Open Market Committee (2020) pointed out the importance of astable financial system for the sustained achievement of maximum employment and pricestability. In Kashyap and Siegert (2020), a paper presented as part of the same review, theinterrelationship between monetary policy and financial stability is an important point, notingthat while financial instability may threaten price stability, monetary policy may also affectfinancial stability. The relationship between monetary policy and financial stability was one of
the issues discussed by the European Central Bank in its 2020-2021 Strategic Review. It has
been pointed out that financial stability is a prerequisite for price stability, that a low interest
rate environment may create incentives for more risk-taking, and that a flattening yield curve
may lead to shrinking interest margins, which would adversely affect the profitability of banks
and their loss-absorbing capacity (European Central Bank (2021), Altavilla et al. (2021)).
Kawamoto et al. (2021) examined the effects of monetary policy in Japan using a structuralmodel. Kawamoto et al. (2021) conducted a counterfactual simulation using the Q-JEM(Quarterly Japanese Economic Model), a macroeconomic model developed by the Researchand Statistics Department of the Bank of Japan, as part of the "Assessment for Further Effective
and Sustainable Monetary Easing" conducted in 2021.5 Kawamoto et al. (2021) reports that the
introduction of the BOJ's "Quantitative and Qualitative Monetary Easing" had a positive effectprofitability due to a decrease in interest rates may reduce lending. In our analysis, given that the capital ratioof banks does not decrease significantly, the decline in interest rates due to the LSME did not necessarily
impede financial intermediation.
5 For the detail of the Q-JEM, see Ichiue et al. (2009), Hirakata et al. (2019), among others.

4

on real GDP and consumer prices until July-September 2020. More recently, Monetary Affairs
Department, Bank of Japan (2023) examined the effect of unconventional monetary policy on
the economy and prices using a factor-augmented VAR and confirmed its positive effects on
the real economy and prices. The report also shows that unconventional monetary policies haveincreased loans outstanding, but have shrunk the profits of banks by squeezing interest margins
due to lower loan interest rates. In this paper, we use a structural model that describes thefinancial sector in more detail to analyze the effect on the function of financial intermediationof the decline in interest rates resulting from the LSME. This point differs from Kawamoto etal. (2021), who used a standard macroeconomic model.
(Structure)
The structure of this paper is as follows. First, we explain the analytical method and ourassumptions on the variables that are the premises of the counterfactual simulation. Next, we
explain the counterfactual simulation results and discuss how the function of financial
intermediation during the period of the LSME can be evaluated from the counterfactual
simulation results. Finally, we present our conclusions.

2

Methods and Assumptions
In this paper, we conduct a counterfactual simulation to analyze the effect on the functionof financial intermediation of the decline in interest rates resulting from the LSME. The analysis
is divided into two steps, as shown in Chart 1. First, as a preparation for the analysis, we set thelevel of market interest rates in the absence of LSME (counterfactual scenario) with reference
to Bank of Japan (2024b) and Nakazawa and Osada (2024). The results of real GDP, output gap,
stock price, and nominal exchange rate (yen/dollar) under the counterfactual market interest
rate computed using the Q-JEM are used for the real economy.6 Second, we compute variables
such as loan balance, net interest income, credit cost, and capital adequacy ratio in the
counterfactual scenario using the above assumed variables as exogenous variables in the FMM(financial macro-econometric model), a macro model for analyzing the financial system. Chart
2 overviews the variables that are input into the FMM as exogenous variables and the main
variables simulated using the FMM. We evaluate the effect on the function of financial
intermediation by looking at these variables related to the financial system.
Izawa et al. (2024) examine the effects of the LSME on the real economy using the results of the analysis
of long-term interest rates in Bank of Japan (2024b). For the use of long-term interest rates in analysis, see
Nakazawa and Osada (2024).
65

2.1 Assumptions on counterfactual simulation
The left panel of Chart 3(1) shows the actual and counterfactual values of JGB interest rates
by maturity. The counterfactual values, i.e., the level of interest rates in the absence of LSME,
are simulated by taking into account the effects of JGB purchases as well as Yield Curve Control(YCC). The dotted line indicates that the market interest rate in the counterfactual scenario ishigher than the actual rate shown by the solid line. Looking at different maturities, thecounterfactual interest rate level is higher relative to the actual in the longer-term zone,
indicating that the level of interest rates in the longer-term zone was pushed down moresignificantly by the LSME. The right panel of Chart 3(1) shows the actual and counterfactual
yield curves. In the absence of LSME, the yield curve in the counterfactual scenario is muchsteeper than in the actual. This suggests that the LSME had the effect of significantly flattening
the yield curve.
Next, we calculate counterfactual values for the real economy, exchange rates, and stock
prices under the above counterfactual interest rate levels using the Q-JEM developed by the
Research and Statistics Department of the Bank of Japan. Chart 3(2) shows the annual growthrate of real GDP and the output gap. The actual results exceed the counterfactual, indicatingthat the decline in interest rates due to the LSME has pushed up real GDP and the output gap.
In addition, the stock price index (TOPIX) of the actual shown in the left panel of Chart 3(3)also exceeded the counterfactual, indicating that the decline in interest rates due to the LSME
pushed up the stock price index. The nominal exchange rate shown in the right panel of Chart
3(3) is simulated to be higher than the actual exchange rate in the counterfactual scenario whereinterest rates are higher than in the actual because the Q-JEM is formulated to determine theexchange rate based on interest rate parity.
The counterfactual simulation period is ten years, from April-June 2013 to January-March
2023, the period after the introduction of Quantitative and Qualitative Monetary Easing (QQE),
when the difference between the counterfactual and actual market interest rates became large.
We simulate the effect of the LSME on the financial sector using the financial macroeconometric model (FMM) that incorporates the financial system, with market interest rates,
real GDP, the output gap, stock prices, and the nominal exchange rate as given. We regard thedifference between the financial sector's behavior under the counterfactual, in the absence of
LSME, and the financial sector's behavior under the actual, with LSME, as the effect of the
LSME.

6

2.2 Effect of low interest rates on the financial system in the FMM
In this section, we explain the effect of the LSME assumed in the counterfactual simulation.
The effect of a decline in market interest rates on the function of financial intermediation is notnecessarily clear a priori, as it requires comprehensive consideration of the real economy,
corporate finances, banks' profits, capital adequacy ratios, and other factors.
First, let us examine the positive factors affecting the profits of banks (Chart 4(1)). The
decline in interest rates due to the LSME, accompanying improvement in the economy, and therise in asset prices, such as land prices, improve corporate finances and increase corporate
creditworthiness. As a result, credit risk in lending transactions declines. This improves the
profits of banks through lower credit costs and boosts their capital adequacy ratios throughlower credit risk-weighted assets. The improvement in the real economy due to the LSME
increases loans outstanding due to increased demand for funds, and this is a factor that boosts
the profits of banks. Lending to households, especially housing loans, is affected in much thesame way as lending to corporate firms. That is, an improvement in the economy and lower
lending interest rates due to LSME increases demand for borrowing by households, and an
improvement in the income environment, such as a decline in the unemployment rate due to
LSME, reduces the delinquency rate and credit costs of housing loans, thereby increasing the
profits of banks.
On the other hand, a decline in market interest rates lowers yields on securities held by banks
and loan rates, and with little room for a decline in deposit rates, this puts downward pressure
on the profits of banks by reducing their interest margins (Chart 4(2)). In addition, an increasein loan balances and a rise in stock prices causes capital adequacy ratios to decline through anincrease in risk-weighted assets. Thus, the effect of a decline in interest rates on profits andcapital adequacy ratios of banks is determined by the relative magnitude of these factors. Thus,
the direction of the effect is not clear in advance.
In assessing the function of financial intermediation, it is necessary to consider not only the
profits and capital adequacy ratios of banks, but also the macroeconomic environment,
including corporate sector finances and the household income environment. In addition, theeffect of a decline in interest rates due to LSME may differ depending on the economic agent.
For example, even if lower interest rates have a negative effect on the profits and capital
adequacy ratios of banks, if corporate sector finances improve and credit risk is controlled,loans outstanding may increase and financial intermediation may function more smoothly. Thus,

7while trends in loans outstanding are an important indicator of the effect of lower interest rates
due to LSME on the function of financial intermediation, it is also necessary to evaluate theeffect based on developments in other variables, such as capital, corporate finances, and credit
risk of banks.
(Points to note in evaluation)
Before explaining the analysis on the results, we explain the function for loans outstanding,which plays an important role in the FMM's counterfactual simulation, and review some points
to keep in mind when considering the effect on the financial system. The evaluation of thefunction of financial intermediation depends to a large extent on the function for loans
outstanding, which formulates how much the loans outstanding is affected by factors such asloan interest rates, land prices, GDP, and the capital adequacy ratio of banks. Chart 5 shows theloan functions for the FMM. For domestic corporate loans and domestic loans to individuals,
variables that indicate demand for funds include structural factors such as population growthrate and expected growth rate, as well as the output gap that indicates business cycle fluctuations.
The supply factors for lending include the profits and capital adequacy ratios of banks. In
addition, the rate of change in land prices, which is related to the collateral value of loantransactions and corporate finances, is also used. These variables are expected to have a positiveeffect on lending, and the estimated parameters are actually positive. The other explanatory
variable, the lending interest rate, has the potential to have both a positive and negative effecton loans outstanding, but based on the estimation results, the FMM assumes that an increase in
the lending interest rate decreases loans outstanding. Since these parameters of the loanfunctions in the FMM are still subject to endogeneity issues, the results of the FMM simulation
should be viewed with some latitude.

3

Counterfactual Simulation Results using the FMM
This section describes the results of the counterfactual simulation analysis.

3.1 Net interest income
First, let us discuss net interest income. As shown in Chart 6(1), the net interest income in
the actual is lower than the counterfactual. This suggests the possibility that lower interest rates
due to the LSME may have pushed down net interest income. In this regard, the figures for therespective contributions of loan profit and securities profit, which make up net interest income,show that the actual results for both were lower than the counterfactual, indicating that the8LSME pushed down the net interest income. This point is explained below.
(Loan-related net interest income)First, the decline in interest rates resulting from the LSME has reduced loan interest margins
and loan profits, while the room for a decline in deposit rates has been limited (the left panel ofChart 6(2)). On the other hand, factors such as the improved economy due to the LSME, lower
lending interest rates, rising land prices, and improved financial condition of banks boosted theoverall loans outstanding and mortgage loans outstanding, as shown in the middle two panelsof Chart 6(2). However, the positive contribution from the increase in loans outstanding is notenough to offset the effect of shrinking loan interest margins, and loan-related net interest
income is pushed down by the decline in market interest rates resulting from the LSME.
Loan-related net interest income is depressed by lower interest rates, but loans outstanding
is boosted. Based on the counterfactual simulation results, land price appreciation due to the
LSME contributed to this increase in loans outstanding. The right panel of Chart 6(2) shows
simulated land prices. While the rate of increase in land prices is negative in the counterfactual,
the actual rate of increase is positive, suggesting that land prices were boosted by the
improvement in the real economy, which benefited from the decline in interest rates resulting
from the LSME. It is possible that the increase in collateral values and improved corporate
finances due to higher land prices may have increased loans outstanding by easing borrowing
constraints and reducing credit risk. In addition, it is possible that the accommodative financial
environment further improved corporate finances and the real economy, which in turn led tohigher land prices and increased loans outstanding. 7 Similarly, for housing loans, as in thecorporate sector, higher land prices and improved income conditions increased borrowing
demand and reduced credit risk, which led to an increase in the amount outstanding of mortgage
loans. In the case of housing loans, as in the case of the corporate sector, rising land prices andimproved income conditions may have boosted borrowing demand and reduced credit risk,
which may have boosted the loans outstanding. It should be noted, however, that even in an
accommodative financial environment, demographic changes, a structural component, haveconsistently contributed to put downward pressure on loans outstanding in both the actual andThis point suggests that the so-called "financial accelerator effect" may be working. The financial
accelerator effect is when the effects of monetary policy are amplified by credit channels through changes in
the financial conditions of corporate firms and banks. See Bernanke et al. (1999) for more details on themechanism. See Kiyotaki and Moore (1997) for the propagation mechanism of credit channels with collateral
constraints. See Aoki et al. (2004) for an analysis of financial accelerators in the household sector.
7

9

the counterfactual scenario.
(Securities-related net interest income)
Next, we discuss securities-related net interest income. The decline in market interest rates
due to LSME is a factor that lowers the return on securities investments. However, the rate of
return on securities portfolios varies depending on the duration composition, even if the balanceis identical. Under the low-for-long interest rates and flat yield curve, banks have had an
incentive to lengthen the duration of their securities portfolios due to the need to secure profits
from securities-related net interest income.8 In contrast, under the counterfactual scenario in
the absence of LSME, the yield curve would have been much steeper than it has been in thepast. Therefore, in the counterfactual scenario, there is no incentive to lengthen the duration of
securities, as there is in the actual. Therefore, in the counterfactual simulation, we assume asecurities portfolio in which the duration is not lengthened, and calculate the securities profit
under such a portfolio.9
Chart 7(1) shows the durations of domestic bonds assumed when calculating securitiesrelated net interest income. In the actual, regional banks and shinkin banks, in particular, had totake on longer durations in order to compensate for the decline in profits due to lower yields.
On the other hand, in the counterfactual, duration is assumed to be almost constant because
there is no need to take duration risk.
Chart 7(2) shows the interest margins on securities investments calculated under the above
assumptions. The interest margins on securities investments are higher in the counterfactual
scenario than in the actual. This means that the higher market interest rates in the counterfactual
scenario relative to the actual exceeded the effect of lengthening bond durations in the actual.
This implies that the decline in market interest rates due to the LSME had an effect that could
not be fully compensated for by duration lengthening alone. As shown in Chart 6(1), the resultof securities-related net interest income for the actual, reflecting the effect of the LSME, arelower than for the counterfactuals in the absence of LSME.

See Bank of Japan (2023) and Financial System and Bank Examination Department, Bank of Japan (2024)
for information on the accumulation of interest-rate risks in a low-rate environment.
9 Although it can be assumed that the longer duration of securities portfolios is due to the need to secure
profits under low interest rates, the counterfactual duration assumption works in the direction of reducing theextent of the decline in securities profits due to the drop in interest rates under the Great Moderation. It should
be noted that this assumption may understate the negative side of LSME, i.e., the decrease in earnings offinancial institutions due to lower interest rates.
810

3.2 Credit costs
While the decline in market interest rates due to the LSME put downward pressure on net
interest income due to shrinking interest margins, the decline in borrowing rates and theaccompanying improvement in the economy also improved corporate finances, which in turnhelped to contain credit risk. Chart 8(1) compares actual and counterfactual loan portfolios byborrower classification. The actual results show that, in contrast to the counterfactual, thedowngrading of regional banks and shinkin banks to "in danger of bankruptcy" or below was
suppressed, indicating that the improvement in the economy and corporate finances due to lowinterest rates led to an improvement in portfolio quality, thereby suppressing credit risk. As aresult, the credit cost ratio of the actual in Chart 8(2) is also lower than the counterfactual,
mitigating the impact of the decline in net interest income on capital caused by the narrowing
of interest margins. The counterfactual value of the mortgage delinquency rate shown in Chart
8(3) is also higher than that of the actual. In other words, the improvement in the income
environment due to the decline in the unemployment rate accompanying the improvement in
the economy has suppressed the cost of mortgage credit. Therefore, although the decline inmarket interest rates due to the LSME put downward pressure on net interest income, thedecrease in credit costs due to the improved economy worked to reduce the effect of the decline
in final profits on capital, which is considered to have been a factor pushing up the capital
adequacy ratio.

3.3 Risk-weighted assets and valuation gain/loss on securities holdings
Chart 9(1) shows actual and counterfactual risk-weighted assets. In the actual, which reflects
the effect of lower interest rates due to LSME, the increase in loans outstanding and the rise instock prices are the main factors increasing risk-weighted assets. On the other hand, for majorbanks and regional banks, many of which use the internal model approach, risk-weighted assets
in the actual are lower than the counterfactual because the lower probability of default due toimproved corporate finances suppresses credit risk-weighted assets. In other words, the lower
interest rates resulting from LSME have the effect of reducing risk-weighted assets by lowering
credit risk, and this has been a factor in boosting capital adequacy ratios.
Chart 9(2) shows the valuation gains/losses on securities holdings. The actual valuation
gains/losses on securities holdings exceeded the counterfactual, indicating that the decline ininterest rates due to the LSME had the effect of raising bond prices and stock prices, thereby
improving valuation gains/losses on securities holdings. This is another reason why the capital11

adequacy ratio is expected to increase.

3.4 Capital adequacy ratios
Finally, we examine the effect on capital adequacy ratios. Chart 10(1) shows the capital
adequacy ratios on a regulatory capital basis. In all bank types, the pre-provision net revenue(PPNR) excluding trading income in the actual has been lower than in the counterfactual. Thisis due to the fact that the decline in interest rates has had a greater impact on the reduction ofinterest margins than the increase in loans outstanding due to the LSME. On the other hand, theimprovement in corporate finances due to the improved real economy and the decrease in credit
costs and risk-weighted assets due to lower credit risk have worked to improve the actual capital
adequacy ratio relative to the counterfactual.
Chart 10(2) shows the capital adequacy ratio on an economic capital basis, which takes into
account the valuation gains/losses on securities holdings. The results for internationally active
banks are identical to those shown in Chart 10(1) above, as they take into account valuation
gains/losses on securities holdings on a regulatory capital basis. On the other hand, domestic
banks do not take into account valuation gains/losses on securities holdings in their capital
adequacy ratios on a regulatory capital basis, so there is a difference between the regulatory
capital basis and the economic capital basis. In other words, on an economic capital basis,
valuation gains/losses on securities holdings contributed positively to the capital adequacy ratioof the counterfactual, reflecting the rise in bond prices and stock prices due to lower interest
rates.
In both the regulatory and economic capital cases, the decline in interest rates reduced the
PPNR excluding trading income through a narrowing of interest margins, which in turn lowered
the capital adequacy ratio. On the other hand, the decline in interest rates and the accompanying
improvement in the real economy side pushed up the capital adequacy ratio through a decreasein credit costs and credit risk-weighted assets, as well as through an improvement in valuation
gains/losses on securities holdings. As a result of both positive and negative forces, the results
indicate that the capital adequacy ratio was not necessarily pushed down significantly by the
decline in market interest rates.

3.5 Evaluation of the effects of LSME on financial intermediation
In the following, we summarize the relationship between the counterfactual simulation
results and the function of financial intermediation. According to the counterfactual simulation12

results, the decline in interest rates due to the LSME has reduced the interest margins of banks,
which are the main providers of funds. However, the capital adequacy ratio was not necessarily
pushed down significantly, as lower interest rates boosted the price of stocks and bonds andreduced credit risk. On the other hand, the improving economy and lower lending interest rates
have increased demand from the corporate sector, which is the main source of demand for funds,
leading to an increase in the loans outstanding. In addition, the improvement in corporate
finances due to the improved economy, lower lending interest rates, and rising price of land andother assets has contributed to the facilitation of financial intermediation by reducing the credit
risk involved in lending by banks, thereby facilitating smooth lending transactions between
firms and banks. Furthermore, for housing loans, as in the case of the corporate sector, theimprovement in the income environment due to the improved economy, lower lending interest
rates, and the rising price of land and other assets is believed to have led to an increase in theloans outstanding through increased demand for borrowing by households and the suppressionof credit risk. This point can be interpreted as a spillover effect of the lower interest rates
resulting from the LSME that improved the financial conditions of firms and households.
In light of these points, it seems that a decline in interest rates due to LSME does notnecessarily have a negative effect on the function of financial intermediation, taking into
account the impact not only on banks but also on the real economy and the corporate sector.
Abadi et al. (2023) and others have discussed the possibility that a large decline in interest rates
would reduce the profits of banks, which would in turn reduce their lending (reversal rate
theory). However, based on the discussion so far, it seems that in Japan the decline in interest
rates due to the LSME has not necessarily reduced the financial intermediation function as awhole, although it has reduced the interest margins of banks.
In this paper, the evaluation of the function of financial intermediation is focused on whether
lending transactions between banks, which are the providers of funds, and corporate firms,
which are the main source of demand for funds, have been conducted smoothly. In this sense,
we have focused our evaluation on changes in the loans outstanding. For this reason, we havenot included details of the increase in loans in our analysis. However, as the period of monetaryeasing was prolonged, banks increased lending to real estate-related businesses, including
housing loans, and to middle-risk corporate firms with relatively low profitability, in order tosecure profits. This raises the question as to whether, while it improved corporate finances, thelow interest rate environment resulting from the LSME also led to the preservation of low-13

productivity firms.10 A separate analysis is needed to address this issue.

4

Concluding Remarks
In this paper, we examine the effects of the decline in interest rates resulting from LSME on

the profits and capital adequacy ratio of banks, and on the function of financial intermediation.
There are both positive and negative effects of the decline in interest rates resulting from LSME,
and it is not clear a priori which is the larger of the two. For this reason, in examining the effectsof the LSME in Japan, we use the FMM to simulate corporate finances, loan balances, banks'
profits, and capital adequacy ratios under a counterfactual scenario in which interest rates do
not fall, and we compare them to the actual values to examine the effect of the decline in interest
rates due to LSME.
The counterfactual simulation results suggest the following. First, the decline in interest rates
resulting from the LSME had a negative impact on capital adequacy ratios by reducing theinterest margins on loans and securities and thereby lowering the profits of banks. However, an
improving economy and lower lending interest rates increased demand for funds from corporate
firms, leading to an increase in loans outstanding. In addition, the improvement in corporate
finances due to the improved economy, rising asset prices, and lower lending interest rates arethought to have curbed credit risk and enabled banks to lend more smoothly. Similar to thecorporate sector, the increase in demand for housing loans due to rising land prices andimproved income conditions, as well as the suppression of credit risk, led to an increase inmortgage loans outstanding. This suggests that the effect of lower interest rates due to the
LSME may have had a spillover effect through the improvement of the financial conditions offirms and households. In this respect, the decline in interest rates resulting from the LSME
contributed to the facilitation of the function of financial intermediation of the financial system
as a whole.
The first point to note about the counterfactual simulation results is that (1) the duration wasset flat in the counterfactual bond portfolio. It should be noted that this assumption also affects
the results of the simulation of the downward pressure on the profits of banks, which is anegative aspect of a decline in interest rates. (2) Next, regarding the formulation of the model,
the results and implication of this analysis are particularly dependent on the formulation and
For the characteristics of bank lending in a low interest rate environment, see Financial System and Bank
Examination Department, Bank of Japan (2024). In recent years, some studies have pointed out that low
interest rate environments can distort the allocation of capital and reduce productivity. See Kiyotaki et al.
(2021), Gopinath et al. (2017), Asriyan et al. (2021) and Hirakata and Sunakawa (2019), for example.
1014

parameters of the loan functions. For example, the estimation of the loan functions is subject toa certain degree of uncertainty in the accuracy of parameter estimation due in part toendogeneity issues. It should be noted that the analysis presented here is the result of mechanicalsimulations based on such assumptions and models. In light of the above, the results should beinterpreted with some latitude.
Finally, while the LSME lengthened the duration of loans, bonds, and other investments, theincrease in loans outstanding has been dominated by real estate-related loans and loans to lowprofit middle-risk firms. This point is beyond the scope of this model analysis but is discussed
in detail in the review of the function of financial intermediation over the past 25 years in
Financial System and Bank Examination Department, Bank of Japan (2024). Another important
issue is how future changes in the economic and financial environment will manifest the risksof these loans and how they may affect the profitability of banks and the function of financial
intermediation.
References[1] Abadi, Joseph, Markus Brunnermeier and Yann Koby (2023). "The Reversal Interest Rate."
American Economic Review, 113 (8): 2084-2120.
[2] Abe, Nobuhiro, Kyosuke Chikamatsu, Kenji Kanai, Yusuke Kawasumi, Ko Munakata,
Koki Nakayama, Tatsushi Okuda and Yutaro Takano (2023), "The Financial Macroeconometric Model (FMM, 2022 Version)," March 2023.
[3] Altavilla, Carlo, Wolfgang Lemke, Tobias Linzert, Jens Tapking and Julian vonLandesberger (2021), "Assessing the Efficacy, Efficiency and Potential Side Effects of the
ECB's Monetary Policy Instruments since 2014," Occasional Paper Series 278, European
Central Bank.
[4] Aoki, Kosuke, James Proudman and Gertjan Vlieghe (2004), "House prices, consumption,and monetary policy: a financial accelerator approach," Journal of Financial
Intermediation, vol. 13(4), pages 414-435, October.
[5] Asriyan, Vladimir, Luc Laeven, Alberto Martin, Alejandro Van der Ghote and Victoria
Vanasco (2021), "Falling Interest Rates and Credit Misallocation: Lessons from General
Equilibrium."[6] Balloch, Cynthia and Yann Koby (2023), "Low Rates and Bank Loan Supply: Theory andEvidence from Japan" July 2023.

15

[7] Bank of Japan (2023), "Financial System Report (October 2023)," October 2023.
[8] Bank of Japan (2024a), "Financial System Report (April 2024)," April 2024.
[9] Bank of Japan (2024b), "Outlook for Economic Activity and Prices (April 2024)," April
2024.
[10] Bernanke, Ben S., Mark Gertler and Simon Gilchrist (1999), "The Financial Accelerator ina Quantitative Business Cycle Framework," Handbook of Macroeconomics, Elsevier,
Volume 1, Part C, Chapter 21，Pages 1341-1393.
[11] European Central Bank (2021), "The Role of Financial Stability Considerations in
Monetary Policy and the Interaction with Macroprudential Policy in the Euro Area," ECB
Occasional Paper Series No 272, Work stream on macroprudential policy, monetary policy
and financial stability, September 2021.
[12] Federal Open Market Committee (2020), "Revised Statement on Longer-Run Goals andMonetary Policy Strategy," as amended (effective August 27)[13] Financial System and Bank Examination Department, Bank of Japan (2024), "The Effectsof Monetary Easing on Japan's Financial System," July 2024.
[14] Gopinath, Gita, Şebnem Kalemli-Özcan, Loukas Karabarbounis and Carolina VillegasSanchez (2017), "Capital Allocation and Productivity in South Europe," The Quarterly
Journal of Economics, vol. 132, issue 4, 1915-1967.
[15] Hara, Naoko, Hibiki Ichiue, Tomiyuki Kitamura, Satoko Kojima, Koji Nakamura andToyoichiro Shirota (2009), "Quarterly Japanese Economic Model (Q-JEM)," Bank of Japan
Working Paper Series, No. 09-J-6.
[16] Hirakata, Naohisa and Takeki Sunakawa (2019), "Financial Frictions, Capital
Misallocation, and Structural Change," Journal of Macroeconomics, vol. 61, 103127.
[17] Hirakata, Naohisa, Kazutoshi Kan, Akihiro Kanafuji, Yosuke Kido, Yui Kishaba, Tomonori
Murakoshi and Takeshi Shinohara (2019), "The Quarterly Japanese Economic Model (QJEM): 2019 version," Bank of Japan Working Paper Series, No.19-E-07.
[18] Izawa, Kimihiko, Yusuke Takahashi and Syunichi Yoneyama (2024), "Measuring Policy
Effects since the Introduction of Quantitative and Qualitative Monetary Easing (QQE): An
Analysis of Policy Effects on the Economy and Prices Using the Macroeconomic Model
Q-JEM," Unpublished manuscript.

16

[19] Kashyap, Anil K. and Caspar Siegert (2020), "Financial Stability Considerations andMonetary Policy," International Journal of Central Banking, International Journal ofCentral Banking, vol. 16(1), pages 231-266, February.
[20] Kawamoto, Takuji, Yui Kishaba, Kohei Matsumura, Jouchi Nakajima and Takashi
Nakazawa (2021), "Estimating Effects of Expansionary Monetary Policy since theIntroduction of Quantitative and Qualitative Monetary Easing (QQE) Using theMacroeconomic Model (Q-JEM)," Supplementary Paper Series for the "Assessment" (2),No. 21-J-7.
[21] Kiyotaki, Nobuhiro and John Moore (1997), "Credit cycles," Journal of Political Economy,
105 (2), 211-248.
[22] Kiyotaki, Nobuhiro, John Moore and Shengxing Zhang (2021), "Credit Horizons," NBER

Working Papers 28742, National Bureau of Economic Research, Inc.
[23] Monetary Affairs Department, Bank of Japan (2023), "The Effects and Side Effects ofUnconventional Monetary Policy," Presentation slides at the first workshop on the Review
of Monetary Policy from a Broad Perspective, December 4th 2023 (in Japanese).
[24] Nakazawa, Takashi and Mitsuhiro Osada (2024), "Bank of Japan's Large-Scale
Government Bond Purchases and its Effect on Long-Term Interest Rates," forthcoming.

17

(Chart 1)

Simulation method
1. Setting the prerequisite variables
Simulate market interest rates
without large-scale monetary easing (counterfactual)

Simulation using Q-JEM
Simulate growth rate of GDP, output gap, stock price andnominal exchange rate under the counterfactual scenario

2. Simulation using FMM
Simulate banks' profits, capital, loans outstanding
and interest margins under the counterfactual scenario

Simulate the effects of Large-Scale Monetary Easing on
the financial system by comparing actual values
and values under the counterfactual scenario

18

(Chart 2)

Assumptions in the counterfactual analysis<Exogenous variables input into FMM>
Note
Government bondyieldsBank of Japan (2024b), Nakazawa and Osada (2024)

Real GDP

Izawa, Takahashi and Yoneyama (2024)

FX rate, stock priceIzawa, Takahashi and Yoneyama (2024)<Variables simulated by FMM>
Note (factors behind changes, etc.)

Loans outstanding

Function of lending interest rates, land price,financial conditions, GDP, population, etc.

Lending interest rates

Function of market interest rates, durations, etc.

Outstanding amount of
securities

Unchanged from the end of actual period

Duration of bonds

Unchanged from the end of actual period

Yields on securities

Function of market interest rates, durations

Deposits

In line with loans outstanding and outstanding
amount of securities

Land price

Function of real GDP

Net interest income

Function of interest margins of loans and securities,
outstanding amount of investment

Credit costs

Function of real GDP, borrower firms' ICR (lending
interest rates), etc.

Valuation gains/losses
on securities holdings

Sovereign bonds : function of durations, interest
rates
Credits products : function of durations, interest
rates, rating composition
Stocks etc. : function of stock price, fund priceRisk-weighted assets

Internal rating-based approach : In line with creditsof borrower firms
Standardized approach : Unchanged

Capital adequacy ratios

Function of capital, risk-weighted assets, etc.

19

(Chart 3)

Assumptions on counterfactual scenario(1) Interest rates<By maturity>
2.0 %1Y(actual)2Y(actual)
5Y(actual)
10Y(actual)

1.5<FY2013-2022 average>%

1.2

1Y(CF)
2Y(CF)
5Y(CF)
10Y(CF)

Actual1.0Counterfactual

0.8
1.0

0.6
0.4

0.5

0.2
0.0
0.0
-0.5
FY 10

-0.2
11

12

13

14

15

16

17

18

19

20

21

22

ON 3M 6M 1Y

2Y

3Y

4Y

5Y

6Y

7Y

8Y

9Y 10Y(2) Real gross domestic product<Real GDP>
4

<Output gap>

y/y % chg.

4

%

3
2

2
1

0

0
-2
-1
-2

-4

-3
-4

Actual-6Counterfactual

Counterfactual-8
FY 10 11 12 13 14 15 16 17 18 19 20 21 22-5
FY 10 11 12 13 14 15 16 17 18 19 20 21 22

Actual(3) Financial variables<TOPIX>
2,200<U.S. yen/dollar rates>

pts

150

2,000

140

1,800

130

1,600

120

1,400

110

1,200

100

1,000

90

800
600
FY 10

11

12

13

14

15

16

17

18

yen

ActualCounterfactual

80

19

70
FY 10 11 12 13 14 15 16 17 18 19 20 21 22

20

21

22

Note: The shaded areas in the charts indicate simulation periods.
Source: Cabinet Office; JPX Market Innovation & Research; Ministry of Finance; BOJ.

20

ActualCounterfactual

(Chart 4)

The effects of large-scale monetary easing

Increase in asset price

Increase in GDP(land price, stock & bonds price)

Improvement in

Improvement inloans

firms' financial

valuation gains/losses

outstanding

conditions

on securities holdings(1) Positive effects

Decrease in credit costs

Banks' profits and capital adequacy ratios

Reduction in lending

Reduction in interest

interest margins

margins on securities

Since the impacts of rise in interest rates on banks' profits and capital adequacy
ratios could be either positive or negative, the direction of the impact on loans
outstanding cannot be determined in advance.

21(2) Negative effects

Decline in market interest rates & lending interest rates

Large-scale monetary easing

Increase in(Chart 5)

Functions for loans outstanding in FMM▽ Specification of the model for domestic corporate loans
Domestic corporate loan𝑖 [y/y chg. ]= 𝛼1 × Output gap + 𝛼2 × Expected economic growth rate
+𝛼3 × Population growth rate + 𝛼4 × Growth rate of land prices+𝛼5 × ሺCapital adequacy ratio𝑖 − Threshold𝑖 ሻ × ൫1 + 𝛾1 × DummyCAR𝑖 <threshold𝑖 ൯+𝛼6 × 𝑅𝑂𝐴𝑖 × ൫1 + 𝛾2 × DummyNet income ROA𝑖 <0 ൯
+𝛼7 × Domestic lending interest rate𝑖 [1 − quarter lag, chg. from previous year]+Fixed effect 𝑖 + Constant――𝑖 denotes individual banks, hereafter.

▽ Specification of the model for domestic loans to individuals
Domestic household loans𝑖 [y/y chg. ]= 𝛼1 × Output gap + 𝛼2 × Expected economic growth rate
+𝛼3 × Population growth rate + 𝛼4 × Growth rate of land prices+𝛼5 × ሺCapital adequacy ratio𝑖 − Threshold𝑖 ሻ × ൫1 + 𝛾1 × DummyCAR𝑖 <threshold𝑖 ൯+𝛼6 × 𝑅𝑂𝐴𝑖 × ൫1 + 𝛾2 × DummyNet income ROA𝑖 <0 ൯
+𝛼7 × Domestic lending interest rate𝑖 [1 − quarter lag, chg. from previous year]+Fixed effect 𝑖 + Constant22

(Chart 6)

Simulation result (1)(1) Net interest income
Internationally active banks

Domestic banks (excl. shinkin)

Domestic shinkin banks
Actual - Counterfactual, %pt

%

4.0

1.5

3.0

1.0

2.0

0.5

1.0

0.0

-0.5

0.0
FY13

15

17

19

13

21

Securities factor (rhs)

15

17

19

13

21

Loan factor (rhs)15

17Actual (lhs)1921Counterfactual (lhs)Note: Shows net interest income (relative to risk-weighted assets) and the contribution of each factor to thedifference between the actual and counterfactual.
Source: BOJ.

(2) Net interest income on loans<Lending margin><Loans outstanding>
Total

1.5

%

Housing loans
tril. yentril. yen

80

170

700

60

160

650

40

150

750

<Land prices>tril. yentril. yen

40

8y/y % chg.

30
4

1.2
20
0
600

20

140

10

550

0

130

0

0.9
-4
ActualActualCounterfactual

Counterfactual
0.6
FY 13

15

17

19

21

500
FY 13

15

17

19

21

-20 120
FY13

Other (rhs)
Macroeconomic factors (rhs)Counterfactual (lhs)

-10
15

17

19

21

-8
FY10

13

16

19

Financial factors (rhs)Actual (lhs)Note: 1. In the left-hand chart of (2), lending margin is defined as lending rate minus funding rate.
2. The middle chart of (2) shows actual and counterfactual loans outstanding and the contribution of eachfactor to the difference between the actual and counterfactual. "Financial factors" includes the effects oflending rate, land prices, bank's financial conditions, etc. "Macroeconomic factors" includes the effects of
output gap, population, etc.
3. In the right-hand chart of (2), "Land prices" refers to "Urban Land Price Index". The shaded area indicatessimulation period.
Source: Japan Real Estate Institute; BOJ.

23

22

(Chart 7)

Simulation results (2)(1) Duration of bonds
Major banks
8

Shinkin banks

Regional banks

years
Actual7Counterfactual

6

5

4

3

2

1

0
FY 13 14 15 16 17 18 19 20 21 22

13 14 15 16 17 18 19 20 21 22

13 14 15 16 17 18 19 20 21 22

Note: Covers domestic bonds.
Source: BOJ.

(2) Margins on securities
1.0

%

0.8

0.6

0.4

0.2

ActualCounterfactual

0.0
FY 13

14

15

16

17

18

19

20

21

22

Note: Covers domestic securities. "Margins on securities" is calculated as yields on securities minus funding rates.
Source: BOJ.

24

(Chart 8)

Simulation results (3)(1) Borrower classification
Major banks
ActualRegional banks

Counterfactual

ActualShinkin banks
ActualCounterfactual

Counterfactual
%

%

%
100

95

90

85

80

75

70

65
FY00

05

10

15

20

10

15

00

20

05

"In danger of bankruptcy" and below

10

15

20

10

15

20

"Special attention"

00

05

10

15

"Need attention"

20

10

15

20

"Normal"Note: "Need attention" indicates "Need attention excluding special attention" from fiscal 2004.
Source: BOJ.

(2) Credit cost ratios
Internationallyactive banks
0.4(3) Mortgage delinquency rates
Domestic banks(excl. shinkin)

Domestic
shinkin banks
0.4

0.3

% Actual－Counterfactual, %pt
0.6

0.5

0.5

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1

0.0

0.0

-0.1

-0.1

-0.2

-0.2

0.3

0.2

0.2

0.1

0.1

0.0

0.0

-0.1

-0.1

-0.2
FY 13

0.6

Actual－Counterfactual, %pt

%

-0.2
15

17

19

21

13

15

GDP factor (rhs)Counterfactual (lhs)

17

19

21

13

15

17

19

21

Interest rates factor (rhs)Actual (lhs)Note: In mortgage delinquency rates (three months over), the sum of thedeviation factors does not match the difference between actual andcounterfactual because only the umemployment rate and the interest
rate factor are shown as deviation factors.
Source: BOJ.

25

-0.3
FY 13

-0.3
15 17 19 21
Unemployment rate factor (rhs)Interest rates factor (rhs)Counterfactual (lhs)
Actual (lhs)(Chart 9)

Simulation results (4)(1) Risk-weighted assets
Internationally active banks Domestic banks (excl. shinkin )160

Domestic shinkin banks

FY2012=100

Actual - Counterfactual

15

140
10
120
5
100
0

80
60

-5
40
-10
20
0
FY 13 14 15 16 17 18 19 20 21 22-15
13 14 15 16 17 18 19 20 21 22
Actual (lhs)

13 14 15 16 17 18 19 20 21 22Counterfactual (lhs)

Other (rhs)

Exchange rates factor (rhs)

Loans outstanding factor (rhs)

Suppressing defaults factor (rhs)

Capital gains in stocks factor (rhs)Note: "Loans outstanding factor" includes the valuation change of corporate bonds.
Source: BOJ.

(2)The ratio of valuation gains/losses on securities
Internationally active banks Domestic banks (excl. shinkin )3

Domestic shinkin banks
Actual - Counterfactual, %pt

%

3

2

2

1

1

0

0

-1

-1

-2
FY 13 14 15 16 17 18 19 20 21 22
Stocks (rhs)-2
13 14 15 16 17 18 19 20 21 22
Bonds (rhs)Actual (lhs)

13 14 15 16 17 18 19 20 21 22Counterfactual (lhs)Note: Shows the ratio of valuation gains/losses on securities (excluding held-to-maturity securities andincluding strategic stockholdings) to risk-weighted assets and the contribution of each factor to thedifference between the actual and counterfactual.
Source: BOJ.

26

Counterfactual

Note: 1. Indicates the contribution of each factor to the difference between the capital adequacy ratios under thecounterfactual scenario and the actual capital adequacy ratios at the end of the simulation period (as of endfiscal 2022).
2. The left-hand chart shows the CET1 capital ratio of internationally active banks. The middle and right-handcharts show the core capital ratio of domestic banks.
3. The economic capital ratios of domestic banks take into account the changes in valuation on securities
holdings.
Source: BOJ.

27

8
8

7
7
7

6
6
6

5
5
5

Domestic banks (excl. shinkin )

%
15

14

13
13

12
12
12

11
11
11

10
10
10

9
9
9

8
8
8

7
7
7

6
6
6

5

5

5

Actual8

Actual9

Taxes and other factors

109Taxes and other factors

109Chg. in risk-weighted assets

10Chg. in risk-weighted assets

11

Realized gains/losses
on securities holdings

11

Realized gains/losses
on securities holdings

12

11

PPNR excl. trading income

13

12

PPNR excl. trading income

14

Credit costs

15

Credit costs

14

Chg. in valuation on
securities holdings%

Counterfactual

ActualTaxes and other factors

Chg. in risk-weighted assets

Realized gains/losses
on securities holdings

PPNR excl. trading income

Domestic banks (excl. shinkin )Counterfactual

ActualTaxes and other factors

15Chg. in risk-weighted assets

14

13
Increasing factor
Decreasing factor

Realized gains/losses
on securities holdings%

PPNR excl. trading income

Internationally active banks
Credit costs

15

Credit costs

13

12
Increasing factor
Decreasing factor

Chg. in valuation on
securities holdings%

Counterfactual

ActualTaxes and other factors

Chg. in risk-weighted assets

Internationally active banks

Counterfactual

ActualTaxes and other factors

14
Realized gains/losses
on securities holdings

PPNR excl. trading income

Credit costs

13

Chg. in risk-weighted assets

Counterfactual

14

Realized gains/losses
on securities holdings

PPNR excl. trading income

Credit costs

15

Chg. in valuation on
securities holdings

15

Chg. in valuation on
securities holdings(Chart 10)

Simulation results (5)(1) Capital adequacy ratios%

Domestic shinkin banks(2) Economic capital ratios

Domestic shinkin banks%