The peer review examined two topics relevant for financial stability and important for Japan: the macroprudential policy framework, and the framework for resolution of financial institutions. The review focused on the steps taken by the authorities to implement reforms in these areas, including with respect to the recommendations in the 2012 Financial Sector Assessment Program (FSAP) report by the International Monetary Fund (IMF).
The peer review finds that progress has been made on both topics in recent years. In particular, the creation of the Council for Cooperation on Financial Stability in 2014 facilitates the periodic exchange of views among senior Bank of Japan (BoJ) and Japan Financial Services Agency (JFSA) officials on macroprudential issues. The establishment of the Macroprudential Policy Office in 2015 has enhanced the JFSA’s macroprudential monitoring capabilities. There is improved data collection and use of market intelligence for risk analysis, and enhanced dissemination of information. The analytical frameworks of the BoJ and JFSA have become more sophisticated, while public communication of risk assessments has improved.
In addition, the 2013 revisions to the Deposit Insurance Act introduced a regime for ‘orderly resolution’ that covers all financial institutions. Few other FSB jurisdictions have implemented such a cross-sectoral resolution regime with a wide range of powers, so this represents a substantial enhancement to Japan’s resolution framework. The authorities have also expanded the scope of recovery and resolution planning, and developed a preferred resolution strategy for Japanese global systemically important banks in their proposed framework for the orderly resolution of such firms.
Notwithstanding this progress, the review concludes that there is additional work to be done:
- On the macroprudential policy framework, this involves strengthening the institutional arrangements for financial stability; improving inter-agency cooperation to develop coordinated systemic risk assessments; and broadening systemic risk analysis. Much of this work relates to making macroprudential policy-setting more explicit, with clearer roles and closer cooperation among authorities as well as with stronger analytical tools for decision-making.
- On resolution, this involves developing transparent and formal guidance on the choice of resolution measures; publicly clarifying the resolution funding framework to minimise gaps between market expectations and the authorities’ intentions; developing sector-specific adaptations to, and strategies based on, the resolution regime; and ensuring that court involvement does not compromise the timely and effective implementation of resolution measures. These would ensure that the resolution framework aligns fully with the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions and is perceived as credible by market participants.
The peer review report includes recommendations to the Japanese authorities in order to address these issues.