Japan: Financial Sector Assessment Program-Technical Note-Systemic Risk Analysis and Stress Testing the Financial Sector

Abstract

A comprehensive set of stress tests and interconnectedness were conducted to assess the resilience of Japan's financial system and shed light on linkages and potential vulnerabilities. Japan has one of the largest and most sophisticated financial systems in the world. Financial conglomerates have a significant presence in the financial system. Banks play a major role in financial intermediation, but Japan's highly concentrated insurance sector is also very sizeable. Similarly, Japanese securities markets rank among the largest in the world, and the system includes a heterogeneous set of securities firms. Various quantitative tools and models were used to examine the impact of short- and medium-term macrofinancial shocks on banks and insurers, and assess connectedness risks within and outside of the financial sector.