Haruhiko Kuroda: The current situation in Japan's financial system and
macroprudential policy
Remarks by Mr Haruhiko Kuroda, Governor of the Bank of Japan, at the Paris EUROPLACE
Financial Forum, Tokyo, 7 December 2015.
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Introduction
It is a great honor to have this opportunity to speak before the Paris Europlace Financial Forum
today. Before I begin, I would like to offer my deepest condolences to the victims of the recent
terrorist attacks in Paris.
Since the global financial crisis, the "macroprudential" perspective has become widely
recognized. Underlying the macroprudential framework is the view that, to ensure financial
stability, it is necessary to devise institutional designs and policy measures to prevent systemic
risk from materializing, based on analyses and assessments of risks in the financial system as
a whole, taking into account the interconnectedness of the real economy, financial markets,
and financial institutions' behavior.
Today, I will start by providing an assessment of the current situation in Japan's financial
system from a macroprudential perspective. I will then share with you my views on some of
the issues regarding macroprudential policy.
Assessment of the Current Situation in Japan's Financial System
Let me begin with an overview of the current situation in Japan's financial system. The Bank
of Japan has been pursuing quantitative and qualitative monetary easing (QQE) since April
2013, and the policy has been steadily exerting its intended effects toward achieving the price
stability target of 2 percent. It goes without saying that the financial system serves as an
important transmission channel through which QQE produces its effects.
Indeed, the following positive financial effects have been observed in the past two and a half
years: (1) stability of long-term interest rates at low levels and declines in credit risk premiums;
(2) progress in portfolio rebalancing among financial institutions and institutional investors; and
(3) a positive spillover to asset prices. Looking ahead, further enhancement of the financial
intermediation function continues to be expected as financial institutions have secured robust
capital bases.
As such, the effects of QQE are gradually becoming evident on the financial front as well. From
a macroprudential perspective, however, the more financial activity increases, the more
important it becomes to be vigilant as to whether such effects of QQE would lead to financial
excesses or imbalances. Under the current framework for the conduct of
monetary policy, the Bank examines financial imbalances - from a longer-term perspective -
as a risk that will significantly affect economic activity and prices. As part of the examination
process, the Bank releases semiannually its Financial System Report. In this report, it makes
a forward-looking assessment of the stability of the financial system from various angles -
including analyses of the balance between financial institutions' risks and financial bases,
macro stress testing, and the monitoring of risk indicators that suggest signs of financial
imbalances - and presents tasks and challenges toward achieving financial stability. Taking
the latest findings into account, significant financial imbalances are not observed at present.
That said, the Bank will continue to examine developments without presumption.
Macroprudential Policy
I will now turn to macroprudential policy. In recent years, this area has seen various
international discussions conducted and measures implemented worldwide. First, "structural
measures" for enhancing the resilience of the financial system, including implementation of the
Basel III requirements and responses to the "Too Big to Fail" problem, have been proceeding
steadily. Second, many countries have been making use of macroprudential measures aimed
at containing excessive financial cycles and the accumulation of imbalances. These are
sometimes referred to as "time-varying macroprudential policy," thereby distinguishing them
from structural measures. In what follows, I will touch upon some of the issues regarding
macroprudential policy.
First, let me discuss the selection and application of "time-varying" macroprudential tools.
Many of the measures that have been adopted recently in various countries are ones with
which to lean against financial cycles, by utilizing regulatory ratios such as the countercyclical
capital buffer (CCB) and the loan-to-value (LTV) ratio. The introduction of the CCB regime is
scheduled for 2016 in countries worldwide, including Japan. Among countries that already
have proceeded with the activation of these measures, some have noted that the measures
have been exerting their intended effects on such sectors as the housing market, where
overheating has been observed. At the same time, some point to the considerable uncertainty
surrounding the measures' effects and to difficulties that accompany their application, including
the following. First, there is a lag after activation before the measures begin producing effects.
Second, leakages of policy effects to unregulated sectors, such as shadow banking
institutions, as well as to overseas, may well occur. And third, measures intended for specific
sectors, such as housing, give rise to the issue of conflict with other governmental measures.
In fact, the inability to employ these macroprudential tools in a timely fashion entails the risk of
accelerating financial cycles.
"Hard" measures, which involve the adjustment of regulatory ratios in a countercyclical
manner, are relatively new. Given this, the ultimate challenge, including responses to the
various others I have just mentioned, is how to carry out these measures in an accountable
manner.
One point I want to stress in relation to this is that, in dealing with financial imbalances, what
is important and effective is supervisory guidance by central banks and financial authorities -
namely, their "soft" approach, by which they issue advance warnings while providing guidance
and advice to financial institutions based on assessments of financial system stability.
Supervisory guidance for financial institutions is primarily regarded as a microprudential
measure. By carrying them out from a macroprudential perspective in an industry-wide and
collective manner, however, the soft approach is capable of producing effects as a form of
macroprudential policy. Moreover, compared with hard approaches like the CCB, this
approach allows for more forward-looking and flexible responses.
Based on such understanding, the Bank's disclosure of the challenges and risks involved in
ensuring financial stability, through the publication of the Financial System Report, and its
responses to these issues, through on-site examinations and off-site monitoring, are
considered part of macroprudential policy.
Second, let me shift my focus to international financial regulations as a form of "structural"
macroprudential policy. Reform of international financial regulation is entering its final stages.
Basel III and responses to the issue of "Too Big to Fail," such as TLAC (Total Loss-Absorbing
Capacity), are measures designed to substantially strengthen the resilience of the global
financial system. Furthermore, it is important to acknowledge the fact that financial authorities
and the financial industry worldwide have developed a common understanding on international
regulation, overcoming differences in their views. This indicates a major step forward, in that
we have created a foundation for international cooperation to tackle many issues and crises
that could arise in the future.
Having said this, I would like to mention several points with regard to the finalization and
gradual implementation of the Basel III regulatory reforms.
The first point is the importance of a comprehensive calibration of the framework in its
finalization. Several of the remaining issues involve quite a number of calibrations based on
the accumulation of very technical and expert considerations, such as the measurement of
risk-weighted assets. The outcome of these considerations would have a significant impact on
the determination of required macro capital and the risk-taking behavior of financial institutions.
I would like to emphasize that the calibration should be finalized in such a way that the amount
of risk-weighted assets and required capital as a whole would be maintained at an appropriate
level, while taking a holistic approach in examining effects on the institutions.
The second point is the necessity of a review of the effects and impacts of these regulatory
reforms after their implementation. Reforms of international financial regulations to date have
been drastic enough that it is no exaggeration to refer to them as a "fundamental re-design."
Looking at individual countries, large-scale financial and structural reforms are underway, as
typified by the Volcker rule in the U.S. The extent of the effects and impacts of these regulatory
reforms on international financial intermediation and flow of funds in the financial sector as a
whole remains unknown, and therefore requires close monitoring. From a long-term
perspective, in order for the financial system to ensure stability and in turn contribute to
sustainable economic growth, financial institutions need to be sufficiently profitable through
active and innovative financial intermediation. In this regard, it is important to remove any
regulatory excess, inconsistency among regulations, and uncertainty regarding the regulatory
environment.
Concluding Remarks
That brings me toward the end of my speech. Topics for discussion regarding macroprudential
policy go beyond those I have raised today. One such topic regards the effective institutional
arrangements for macroprudential policy. Needless to say, there is no such thing as a
universally optimal set of arrangements, as financial and economic structures as well as legal
frameworks differ from country to country. Moreover, the desirable form of arrangements would
vary depending on the kind of macroprudential measures each country intends to utilize.
Looking at the recent developments in countries with multiple regulatory and supervisory
authorities, there has been quite a number of movements to establish new bodies or councils
in charge of macroprudential policy. In Japan, the Financial Services Agency (FSA) - which is
legally authorized to conduct industry-wide supervision and inspections - and the Bank - which
contributes to financial system stability, such as through the "lender of last resort" function -
are making joint efforts in carrying out macroprudential policy, fulfilling their respective
functions.
Furthermore, in June 2014, the two entities together established a task force with the aim of
holding regular joint meetings, and they have been fostering further coordination. The Bank is
determined to continue with its efforts to contribute to ensuring the stability of the financial
system, making use of these arrangements.
Thank you.