Bank of Japan presents summaries of articles published in the November
edition of its Quarterly Bulletin BANK OF JAPAN, COMMUNICATION, 28/11/97.
Flow of Funds in Japan, 1996
Summary
In 1996, the gross amounts of fund-raising and financial investment by the
domestic nonfinancial sector (comprising the corporate business, personal, and public sectors)
during the year both decreased from the previous year, remaining at low levels compared with
the past. The sector's fund-raising through borrowing declined, while funds raised through
government bond issues reached a record high. As for financial investment, there was a larger
net redemption of securities (excluding investment trusts) than in 1995, and the net investment
in insurance products narrowed significantly.
In the corporate business sector, the financial surplus marked a record high. This
was because (1) cash flow improved in excess of the continued growth in fixed investment, due
mainly to a recovery in sales; and (2) interest payments decreased, reflecting low interest rates.
The sector's fund-raising was at its lowest level since 1956 -- the third year of compilation of the
flow of funds accounts -- primarily on account of a net decline in loans, which was more
significant than the previous year, particularly in those from private financial institutions. At the
same time, financial investment also declined from the previous year. Such overall sluggishness
of fund-raising and financial investment activities can be attributed to the persisting
balance-sheet adjustment pressure.
In the personal sector, the financial surplus narrowed, the ratio of financial
surplus to nominal GDP marking a record low. This was because (1) consumption expenditures
increased by a larger margin than the improvement in employees' income; and (2) housing
investment increased due to the effects of low interest rates and a surge in demand ahead of the
rise in the consumption tax rate in fiscal 1997. Both fund-raising and financial investment fell
below the previous year's levels, with conspicuous declines in investments in long-term assets
such as insurance, securities, and trusts. The outstanding amount of financial assets in the
personal sector reached ¥1,200 trillion for the first time at the end of 1996.
In the public sector, a large financial deficit remained, due to expanded
public-sector investment during the first half of the year. Fund-raising through government bond
issues, almost all of which were purchased by the financial sector, marked a record high.
Profits and Balance-Sheet Developments of Japanese Banks in Fiscal 1996
Overview
Operating profits1 of Japanese banks2 in fiscal 1996 amounted to ¥6.4 trillion,
5 percent lower than in the previous year. This decline reflects a decrease in the net bond-related
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profits and in the net interest income of city banks. Excluding a temporary factor3 which
contributed to an increase in profits on trust accounts, the decline in operating profits from the
previous year was about 10 percent.
Loan write-offs and loan-loss provisions4 marked approximately ¥7.6 trillion
(including trust accounts), which is the second highest level following fiscal 1995 when the
jusen (housing loan companies) were liquidated. This suggests that most banks continued to give
high priority to solving the problem of nonperforming loans.
Net stock-related profits5 were no more than about ¥1.0 trillion, approximately
¥2.9 trillion lower than the fiscal 1995 level, due to substantial stock write-downs resulting from
the fall in stock prices. This reflects the fact that banks' balance sheets have become more
exposed to volatility in stock prices because of a rise in the book values of stocks which resulted
from recent cross transactions -- sets of purchases and sales transactions on the same stocks in
order to acquire unrealized capital gain. As the loan write-offs and loan-loss provisions virtually
matched the total of operating profits and stock-related profits, recurring profits and net income
reached close to zero levels, although this represented an improvement from the previous year.
On the Relationship between Monetary Aggregates and Economic Activities in Japan: A Study
Focusing on Long-Term Equilibrium Relationships
Introduction
This paper empirically analyzes the relationship between monetary aggregates and
economic activities in Japan using actual data and focusing on long-term equilibrium
relationships. Long-term time-series data from the 1960s to 1996 are used in the analysis in
order to observe long-term relationships between the most commonly used monetary aggregate,
M2+CDs, and macroeconomic indicators, such as GDP, rather than limiting the analysis to
short-term relationships during the past year or two.1 In addition to long-term relationships, the
discounts, deposits and securities), "net fee and commission income" (e.g., fees and commissions received/paid) and "net other operating
income" (e.g., net profits related to bonds and foreign exchange).
2
"Japanese banks" or "banks" in this article refers to "All Banks," comprising the member banks of the Federation of Bankers Associations of
Japan, which consists of city banks, long-term credit banks, seven trust banks (excluding foreign-owned trust banks and trust banks that started
business after October 1993), the 64 member banks of the Regional Banks Association of Japan (hereafter referred to as regional banks), and the
65 member banks of the Second Association of Regional Banks (hereafter referred to as regional banks II). However, calculated figures exclude
data for Hyogo Bank (the present Midori Bank), Taiheiyo Bank (the present Wakashio Bank), and Hanwa Bank.
3
Specifically, the temporary factor here refers to profits resulting from withdrawals from special reserve funds held by trust banks. The
withdrawal profit resulted from a revision of a government ordinance that reduced the ratio of funds to set aside for the special reserve funds
(from 3 percent of principal to 0.5 percent of principal). These are accumulated to provide for situations in which the value of a loan trust falls
below the value of the principal. The trust banks applied part of the profit to write off nonperforming loans in trusts, and the remainder to be
accounted as trust fees and be registered in the banking accounts as net fee and commission income.
4
This includes not only loan write-offs, but also transfers to special loan-loss accounts (provisions), losses from the sales of nonperforming
loans to the Cooperative Credit Purchasing Company (CCPC), and renunciations of claims.
5
Stock-related profits/losses are calculated by subtracting from "gains on stock-selling operations" the sum of "losses from stock-selling
operations" and "stock write-downs".
1
Note that the sample period includes the period when M2+CDs underwent large fluctuations, i.e. from the latter half of the 1980s to the early
1990s.
stability of the money demand function and also the lead/lag relationships between monetary
aggregates and other macroeconomic indicators are tested.
The conclusions of the paper can be summarized as follows.
(1) When developments in M2+CDs and other macroeconomic indicators are
viewed in the long term, fluctuations in nominal M2+CDs have a relatively stable relationship
with movements in nominal GDP. This can also be confirmed by applying an econometric
technique called "cointegration analysis", which suggests that there is a long-term equilibrium
relationship between the two. On the other hand, the relationship between M2+CDs and
prices -- which along with real GDP make up nominal GDP -- has changed since the latter half
of the 1980s, in the sense that fluctuations in prices have clearly diminished relative to those of
M2+CDs.
(2) A relatively stable money demand function can be estimated, based on the
above long-term equilibrium relationship and incorporating factors for short-term fluctuations.
At least in the sample period, the mechanism of short-term fluctuations has been relatively stable
in M2+CDs, GDP, interest rates, and asset factors, as represented by the money demand
function.
(3) An analysis in terms of lagged cross correlation on the lead/lag relationships
between M2+CDs and other macroeconomic variables reveals that M2+CDs basically leads
nominal and real GDP, domestic private demand, and prices. However, there are differences in
results across sample periods that cannot be ignored.
(4) Similar analyses are conducted, from the standpoints of conclusions (1)-(3)
above, on selected monetary and credit aggregates other than M2+CDs, and on monetary
aggregates obtained by partially changing the components of M1 and M2+CDs. The results
show that these aggregates did not have more stable relationships with macroeconomic
indicators than did M2+CDs.
(5) The above results suggest that, in analyzing monetary aggregates, it would be
effective to use the long-term equilibrium relationship between M2+CDs and GDP as well as the
money demand function incorporating the relationship. In interpreting the empirical results using
the statistical techniques, however, it is necessary to bear in mind the following limitations:
(a) Long-term equilibrium relationships indicate only the average relationship in
the long run, and hence considerable deviations from equilibrium values may arise in the short
term; and
(b) There still remains a possibility that the long-term equilibrium relationships or
money demand functions derived from the previously observed data may change, as a result of a
large shift of funds caused by deregulation and other structural changes in the financial markets
in the future.
Checklist for the Year 2000 Problem
Introduction
The Bank Supervision Department of the Bank of Japan compiled the following
checklist (the original is in Japanese) to assist bank examiners in assessing the adequacy of
financial institutions' risk management framework for addressing the Year 2000 problem
(hereinafter simply "the Problem").1 On August 19, 1997, the checklist was also distributed to
financial institutions to help them in their own evaluation of their action plans.
The checklist emphasizes the significance of each financial institution's
understanding and awareness of the Problem, and calls for the commitment of each institution,
including the top management, to its action plans. In proceeding with the action plans, each
institution is advised to fully assess the effects of the Problem, carefully arrange the scheduling
of the plans, and complete renovation and testing prior to the implementation of the action plans.
The checklist also stresses the importance of other matters including (1) the monitoring of the
progress as to the implementation of the action plans, (2) the scrutiny of legal responsibilities of
outside vendors, and (3) the establishment of contingency plans.
1
Many computer operating systems and applications use six-digit codes for dates -- date fields -- comprising two digits for the year, two digits
for the month, and two digits for the day (for example, December 31, 1999 reads 991231). With such a coding system, the code for the year 2000
will be "00," which may be interpreted as the year 1900, not 2000. This will cause errors in date-sensitive calculations and other issues. Such
problems are referred to as the Year 2000 problem. If measures are not taken to address the problem, normal operations of financial institutions
will be disrupted, which would lead to disturbances in payment and settlement systems nationwide, the effects of which may spread to other
industries.
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NB This Review is available on the BIS Worldwide Web site (http://www.bis.org)
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