## Japan’s Public Sector Balance Sheet (PSBS)

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### Major findings on Japan’s PSBS
- PSBS assets and liabilities: 533 percent of GDP in 2017.
- Public sector cross-holdings: 210 percent of GDP in 2017.
- Public sector net worth: 0 percent of GDP in 2017.
- Public sector net financial worth: negative 165 percent of GDP in 2017.
- General government gross assets and liabilities: both 268 percent of GDP in 2017.
- Financial public corporations (assets and liabilities): 221 percent of GDP in 2017.
- Nonfinancial public corporations (assets and liabilities): 44 percent of GDP in 2017.
- General government nonfinancial assets: 130 percent of GDP (local governments 96 percent of GDP; central government 34 percent of GDP; social security funds 0.1 percent of GDP).
- General government financial assets: 138 percent of GDP (social security funds 48 percent of GDP; foreign reserves 26 percent of GDP; equity holdings of central and local governments 43 percent of GDP; remainder 21 percent of GDP).
- General government liabilities: 268 percent of GDP (central government debt securities/JGBs 183 percent of GDP; local government loans and debt securities 32 percent of GDP; pension liabilities for civil servants 30 percent of GDP).
- BoJ accounted for 100 percent of GDP among financial public corporations; Post Bank 39 percent of GDP; FILF 23 percent of GDP; Post Insurance 14 percent of GDP; remainder 45 percent of GDP across 49 entities.
- Public sector cross-holdings financing central government liabilities: 106 percent of GDP; financed by BoJ 82 percent of GDP and Post Group 19 percent of GDP.
- More than half of central government liabilities financed by other parts of the public sector (Table 1: 116 percent of central government liabilities consolidated as cross-holdings and 58 percent as % of total liabilities of each sector).

### Evolution, drivers, and historical context
- Consolidated PSBS assets: from 197 percent of GDP in 1980 to 323 percent of GDP in 2017.
  - Nonfinancial assets: 151 percent of GDP in 1980 and 165 percent of GDP in 2017.
  - Financial assets: 46 percent of GDP in 1980 and 157 percent of GDP in 2017.
- Consolidated liabilities: from 113 percent of GDP in 1980 to 322 percent of GDP in 2017.
- Public sector borrowing (debt securities and loans): increased from 37 percent of GDP in 1991 to a peak of 163 percent of GDP in 2012; total public sector borrowing built up to 288 percent of GDP.
- After QQE began in 2013, currency and deposits on PSBS liabilities rose from 64 percent of GDP in 2012 to 118 percent of GDP in 2017.
- Public sector net worth:
  - Peak: 97 percent of GDP in 1989.
  - Depleted by fiscal policy since 1989; dipped into negative territory for the first time in 2012 and “remains at zero until now” (as reported).
- Drivers in earlier decades:
  - Net acquisition of nonfinancial assets raised net worth by 5 to 7 percent of GDP per year in the 1980s and 1990s.
  - Revaluation gains increased net worth by around 10 percent of GDP per year during the late-1980s asset price bubble; subsequent revaluation losses reduced net worth by similar magnitudes in the early 1990s.
  - Public sector land holdings: increased by 19 percent of GDP from 1980 to 1989 and decreased by 15 percent of GDP in the following 10 years.
- Population aging: projected to continue until 2066; large majority of consolidated PSBS assets are nonfinancial, illiquid, and hard to value.

### Cross-holdings, creditors, and who finances borrowing
- In 2017:
  - Public sector finances 150 percent of GDP of public sector borrowing.
  - Private sector finances 138 percent of GDP of public sector borrowing.
  - Therefore, 52 percent of public sector borrowing is financed by the public sector itself.
- Shifts in debtors financed by the public sector:
  - Until late 1990s: about half of public sector financing went to public corporations.
  - By recent years: almost all public sector financing provided to the general government.
  - Public sector financing share in public corporations’ borrowing declined from 75 percent in 1999 to 27 percent in 2017.
- Changes in public sector creditors over time:
  - FILF financed up to 77 percent of GDP of public sector borrowing at its peak in 1999; FILF financing fell sharply thereafter.
  - Late 2000s: Post Bank and Insurance and SSFs financed up to 69 percent of GDP of public sector borrowing at their peak in 2009; their financing fell quickly afterwards.
  - QQE consequence: BoJ is currently the largest public sector creditor, holding 82 percent of GDP of JGBs.

### FILF system, reform, and effects
- Pre-reform FILF:
  - FILF centrally provided financing by channeling postal deposits at Post Bank and savings of public pension funds; Post Bank and Employee Pension Fund legally required to loan funds to FILF; FILF required to invest funds into the public sector.
  - FILF investments prioritized absorption of JGB supply over profitability and lowered JGB market volatility.
- Balance-sheet expansion in the 1990s:
  - Postal deposits at Post Bank: from 30 percent of GDP in 1990 to 50 percent of GDP at peak in 1999.
  - Assets of Employee’s Pension Fund: increased by 9 percent of GDP during the same period.
  - FILF total assets: from 54 percent of GDP in 1989 to 85 percent of GDP at peak in 1999.
  - Post Insurance balance sheet increased by 12 percent of GDP.
  - These expansions explain an increase in public sector financing of public sector borrowing by 59 percent of GDP between 1990 and 1999.
- FILF transmitted interest-rate risk due to maturity mismatches (postal term deposits up to 10 years; loans from Post Bank to FILF up to 7 years; loans from FILF to public corporations up to 30 years).
  - Market interest rates dropped from 7 percent in 1990 to less than 2 percent in 1998 (average coupon rates of 10-year JGBs).
  - FILF earned significant profits while Post Bank and other financial public corporations made large losses; losses at Post Bank and others were compensated by budget transfers.
- FILF reform objectives and measures (2000):
  - Abolish legal requirements for Post Bank, Insurance, and SSFs to allocate assets to public sector financing.
  - Fade out FILF’s purchase of JGBs and curtail its financing of public corporations.
  - Shift public corporations to private sector financing.
  - May 2000 law approved; implemented gradually over the next seven years.
- Post-reform outcomes:
  - Public sector placement abolished and used only as transitional until 2007; public sector entities now purchase JGBs via auctions with private investors.
  - FILF balance sheet shrank from 85 percent of GDP in 1999 to 23 percent of GDP in 2017.
  - Post Bank and SSFs increased direct investments in JGBs in the 2000s; GPIF reduced allocation of domestic bonds from 68 percent in 2001 to 35 percent in 2015.
  - Public corporation balance sheets shrank; public sector financing of public corporations decreased.

### Investment behavior and balance-sheet dynamics of major financial public corporations
- At peak in 1998, 87 percent of total assets of the four FPCs were allocated to financing the public sector.
- Post Bank reduced allocation to public sector financing from 95 percent of total assets at peak in 1998 to 33 percent in 2017.
- Social security funds reduced allocation from 77 percent at peak in 1998 to 34 percent in 2017.
- Aggregate balance sheets of FILF, Post Bank and Insurance shrank from 94 percent of GDP in 1999 to 55 percent of GDP in 2017.
- Public sector financing of public sector borrowing decreased from 154 percent to 133 percent of GDP between 2005 and 2012, while general government borrowing increased from 168 percent to 220 percent of GDP and private sector financing rose from 95 percent of GDP in 2005 to 163 percent of GDP in 2012.
- Portfolio practices shifted:
  - Late 1990s: four FPCs lengthened duration and increased share in longer-term JGBs.
  - By 2001: four FPCs reduced risk levels; since 2000s four FPCs and private sector have broadly similar risk adjustments and duration increases.
  - Buy-and-hold practices gave way to more active rebalancing by 2017 (e.g., Post Bank held half of JGBs for maturity and sold around 10 percent in some years).

### Pension funds, demographic pressures, and long-run fiscal implications
- Public pension system composition and 2016 flows:
  - Tier 1: National Pension — flat-rate; pension payments: 4.2 percent of GDP in 2016.
  - Tier 2: Employee’s and Kyosai Pensions — partially funded, defined benefit; pension payments: Employee’s Pension 4.4 percent of GDP and Kyosai 1.1 percent of GDP in 2016.
- Pension reforms and measures:
  - 2000 reform: raise pension eligibility age for Employee’s Pension from 60 to 65 between 2001 and 2013.
  - 2004 reform:
    - Increase in contribution rates of the National Pension and Employee’s Pension from 13.58 percent in 2003 to 18.30 percent in 2017 (Employee’s Pension case).
    - Introduction of “macroeconomic slide” adjustments to pension benefits every year until 2043.
    - Increase in budget transfer to public pensions from one-third to half of National Pension payments.
  - 2012 reform:
    - Integration of Kyosai Pension into Employee’s Pension and increase in Kyosai contribution rates to Employee’s Pension level until 2018.
    - Financing of budget transfers by an increase in consumer taxes.
- Long-run pension asset strategy and fiscal implications:
  - 2004 reform aimed to reduce public pension fund assets over the next 100 years to the level of one year’s worth of pension benefits.
  - Present values over the next 100 years (2014 figures) under current policy for National and Employee’s Pension Schemes:
    - Contributions: 436% of GDP
    - Benefits: 654% of GDP
    - Returns/withdrawal of fund assets: 76% of GDP
    - Budget transfers: 142% of GDP
  - Financing of current pension policy includes a large amount of budget transfers in the future.
- Pension funds shifted from FILF lending (around 70 percent pre-reform) to market investments post-reform, increasing market exposure and yield volatility.

### Risks, implications, and policy-relevant observations
- Large cross-holdings increase risk interlinkages: financial problems in one public sector entity can propagate to others.
- Cross-holdings historically muted JGB yield volatility by centralizing financing; post-reform shift to market-based financing increases exposure to market risks.
- Distribution of net worth is uneven:
  - Central government: large negative net worth.
  - Local governments: positive net worth largely explained by unmarketable nonfinancial assets, contributing little to fiscal sustainability.
- Shareholders’ equity of public corporations (49 percent of GDP in 2017) is recorded as an asset of the general government and as liabilities of public corporations; by construction public corporations’ balance sheets reflect zero net worth.
- Because increasing public sector financing of public sector borrowing seems implausible, further borrowing requires private sector financing, increasing the importance of market-based debt management.
- Intertemporal PSBS considerations:
  - Financing of current pension policy includes budget transfers of around 140 percent of GDP over 100 years.
  - Budget transfers to health insurance schemes increased from 1.2 percent of GDP in 1990 to 3.7 percent of GDP in 2016.
  - Primary deficits of general government have remained around 2½ percent of GDP over the last three years, even after the rise of consumption tax rates in 2014.

### Data, scope, methodological notes, and key accounting identities
- Institutional coverage: general government (central and local), social security funds, nonfinancial public corporations, central bank (BoJ), and other financial public corporations.
- Instrumental scope: all nonfinancial and financial assets and liabilities.
- Data sources: annual national accounts by the Cabinet Office (2017 annual national accounts used), Flow of Funds Statistics (BoJ), reports of individual entities, annual financial statements, and IMF staff estimates; methodologies detailed in Appendix I.
- Cabinet Office estimated public sector capital stock: 128 percent of GDP in 2014.
- Foreign reserve assets: owned by the government; included in the Foreign Exchange Fund Special Account administered by the Ministry of Finance; day-to-day management delegated to the BoJ.
- Pension liabilities for civil servants: follow GFSM 2014 methodologies; include only accrued-to-date pension obligations based on 2014 actuarial estimates and numbers of current employees and pensioners; held constant in terms of GDP since 2014.
- Key accounting identities preserved:
  - Net Worth = Assets – Liabilities
  - Net Financial Worth = Financial Assets – Liabilities
  - Net Lending or Borrowing = Revenue – Expense – Net Investment in Nonfinancial Assets
  - Net Worth1 – Net Worth0 = Net Lending/Net Borrowing1 + Net Acquisition of Nonfinancial Assets1 + Other Economic Flows1

### Local governments, distributional implications, and infrastructure
- Net worth per capita across municipalities: U-shaped distribution; least populated municipalities have largest net worth per capita (Chiba Prefecture, 2016 data).
- Intergovernmental transfer mechanisms concentrate per-capita transfers to smaller municipalities, enabling greater infrastructure accumulation and higher net worth per capita.
- Medium-sized municipalities receive less transfers per capita, face larger fiscal consolidation needs, and may need to reduce public investments and net worth.
- Age profile of public infrastructure (2016): many infrastructures reaching advanced stages of aging, implying higher future maintenance costs or reductions in net worth if maintenance is lacking.

### Post Bank term deposits and 1990s deposit dynamics
- Postal deposits interest accrued between 1989 and 1999: 18 percent of GDP.
- 10-year term deposits comprised 90 percent of total postal deposits during the same period.
- Depositor behavior: redepositing of accrued interest and matured deposits during a period of rapidly falling interest rates expanded Post Bank deposits in the 1990s.
- In the 2000s, interest rates on postal term deposits fell to commercial bank levels; some depositors withdrew matured deposits, and deposit levels decreased back to late 1980s levels, revealing core depositors who keep postal deposits for reasons other than interest rates.
- Extensive branch network cited as a competitive advantage for Post Bank.

*Source: IMF staff analysis and Japan’s national accounts, flow of funds statistics, and individual entities’ financial reports (wpiea2019212-print-pdf).*

### References .............................................................................................................

### References

### Major findings on Japan’s Public Sector Balance Sheet (PSBS)
- Japan’s PSBS has assets and liabilities of 533 percent of GDP in 2017.
- Cross-holdings within the public sector were 210 percent of GDP in 2017 — the largest in the IMF’s PSBS database.
- Public sector net worth is 0 percent of GDP in 2017; public sector net financial worth is negative 165 percent of GDP in 2017.
- Gross assets and liabilities of the general government are both 268 percent of GDP in 2017.
- Financial public corporations (assets and liabilities) amounted to 221 percent of GDP in 2017.
- Nonfinancial public corporations (assets and liabilities) amounted to 44 percent of GDP in 2017.
- General government nonfinancial assets: 130 percent of GDP (local governments 96 percent of GDP; central government 34 percent of GDP; social security funds 0.1 percent of GDP).
- General government financial assets: 138 percent of GDP (social security funds 48 percent of GDP; foreign reserves 26 percent of GDP; equity holdings of central and local governments 43 percent of GDP; remainder 21 percent of GDP).
- General government liabilities: 268 percent of GDP (central government debt securities/JGBs 183 percent of GDP; local government loans and debt securities 32 percent of GDP; pension liabilities for civil servants 30 percent of GDP).
- The BoJ accounts for 100 percent of GDP among financial public corporations; Post Bank 39 percent of GDP; FILF 23 percent of GDP; Post Insurance 14 percent of GDP; remainder 45 percent of GDP spread across 49 entities.
- Public sector cross-holdings financing central government liabilities total 106 percent of GDP; financed by BoJ 82 percent of GDP and Post Group 19 percent of GDP (Table 1).
- More than half of central government liabilities are financed by other parts of the public sector (Table 1 shows 116 percent of central government liabilities consolidated as cross-holdings and 58 percent as % of total liabilities of each sector).

### Evolution, drivers, and historical context
- Japan’s PSBS stood out as one of the largest in the world and includes substantial cross-holdings that helped sustain high public debt and low interest rates prior to 2000.
- Factors commonly cited for falling JGB yields despite rising JGB stocks include: markets’ expectations of future fiscal consolidation; domestic excess savings; the zero interest rate policy lasting for two decades; and slow economic growth lowering real interest rates.
- Cross-holdings provided an additional explanation: more than half of public sector borrowing was financed by the public sector itself.
- Until the 1990s, the Fiscal Investment and Loan Fund (FILF) centrally provided public sector financing of public sector borrowing by channeling postal deposits at Post Bank and savings of public pension funds; FILF investments prioritized absorption of JGB supply over profitability and lowered JGB market volatility.
- FILF reform in 2000 led Post Bank and public pension funds to shift assets away from FILF to market investments and adopt modern portfolio theory objectives (maximize risk-adjusted returns), reducing the dominance of public sector financing in public debt management.
- The balance sheet approach helped identify fiscal risks embedded in the FILF and contributed to the 2000 overhaul of the FILF.
- Population aging poses continuing challenges: Japan had a high level of public sector net worth three decades ago but dipped into negative territory recently; a large majority of consolidated PSBS assets are nonfinancial, illiquid, and hard to value; population projected to continue aging until 2066.
- Pension reforms since 2000 included changes in asset management of public pension funds, limited the rise of contribution rates, and introduced an indexation formula to adjust pension benefits under demographic pressures; nonetheless, current pension policy financing includes large future budget transfers.

### Risks, implications, and policy-relevant observations
- Large cross-holdings increase risk interlinkages: financial problems in one public sector entity can propagate to others.
- Cross-holdings had previously muted JGB yield volatility by centralizing financing, but reforms shifted financing to market-based allocations, increasing exposure to market risks.
- The distribution of net worth is uneven: central government has large negative net worth while local governments have positive net worth largely explained by unmarketable nonfinancial assets, contributing little to fiscal sustainability.
- Shareholders’ equity of public corporations (49 percent of GDP in 2017) is reflected as an asset of the general government and as liabilities of public corporations; by construction the net worth reflected in public corporations’ balance sheets is zero.

### Data, scope, and methodological notes
- Institutional coverage in the PSBS is extended to the broader public sector, including the general government and public corporations (subdivided into nonfinancial public corporations, the central bank, and other financial public corporations).
- Instrumental scope covers all nonfinancial and financial assets and liabilities, beyond gross debt and corresponding financial assets.
- Sources used include national accounts, flow of funds statistics, reports of individual entities, and IMF staff estimates; methodologies and data source details are in Appendix I.
- The Cabinet Office estimated public sector capital stock to be 128 percent of GDP in 2014, corresponding broadly to public sector fixed assets in national accounts.
- Foreign reserve assets are owned by the government, included in the Foreign Exchange Fund Special Account administered by the Ministry of Finance, classified into the central government under national accounts; day-to-day management delegated to the BoJ.
- Pension liabilities for civil servants follow GFSM 2014 methodologies and include only accrued-to-date pension obligations for civil servants of central and local governments; the figure is based on government actuarial estimates and numbers of current employees and pensioners in 2014 and has been held constant in terms of GDP since then.

*Source: IMF staff analysis and Japan’s national accounts, flow of funds statistics, and individual entities’ financial reports (wpiea2019212-print-pdf).*

### 13.      For the last four decades, the liabilities in the consolidated PSBS have grown

### 13.      For the last four decades, the liabilities in the consolidated PSBS have grown more rapidly than the assets

### Trends in consolidated public sector balance sheet (PSBS)
- Consolidated assets: increased from 197 percent of GDP in 1980 to 323 percent of GDP in 2017.
- Nonfinancial assets: 151 percent of GDP in 1980 and 165 percent of GDP in 2017.
- Financial assets: 46 percent of GDP in 1980 and 157 percent of GDP in 2017; growth driven by increased market investments in domestic and foreign securities.
- Consolidated liabilities: tripled from 113 percent of GDP in 1980 to 322 percent of GDP in 2017.
- Public sector borrowing from the private sector (debt securities and loans): increased from 37 percent of GDP in 1991 to a peak of 163 percent of GDP in 2012.
- After BoJ’s Quantitative and Qualitative Easing (QQE) began in 2013, currency and deposits on PSBS liabilities rose from 64 percent of GDP in 2012 to 118 percent of GDP in 2017.

### Evolution of public sector net worth
- Peak public sector net worth: 97 percent of GDP in 1989.
- Net worth trajectory: gradually depleted by fiscal policy since 1989; dipped into negative territory for the first time in 2012 and "remains at zero until now" (as reported).
- Drivers in earlier decades:
  - Net acquisition of nonfinancial assets raised net worth by 5 to 7 percent of GDP per year in the 1980s and 1990s.
  - Revaluation gains increased net worth by around 10 percent of GDP per year during the late-1980s asset price bubble; subsequent revaluation losses reduced net worth by similar magnitudes in the early 1990s (mainly land revaluation).
  - Public sector land holdings: increased by 19 percent of GDP from 1980 to 1989 and decreased by 15 percent of GDP in the following 10 years.
- After mid-2000s: net acquisition of nonfinancial assets dropped to less than 1 percent of GDP per year; revaluation fluctuated without consistent impact; recent evolution of net worth largely explained by general government net borrowing.

### Local government fiscal consolidation and infrastructure concerns
- Cutting public investments in 1990s reduced deficits and debt; local government reforms led to local government fiscal balance reaching surplus in 2006.
- Since 2004 (except 2009), net financial worth of local governments continuously improved due to reduction of debt.
- Age profile of public infrastructure (2016): many infrastructures reaching an advanced stage of aging, implying higher future maintenance costs or reductions in net worth if maintenance is lacking.

### Evolution of public sector borrowing and its composition
- Total public sector borrowing built up to 288 percent of GDP (public sector borrowing defined as debt securities and loans on PSBS liabilities).
- General government borrowing: 60 percent of GDP in 1990 increasing to 226 percent of GDP in 2017; driven by high net borrowing (6 percent of GDP on average for the last 25 years) and low real economic growth (0.9 percent on average for the last 25 years). Recent years: growth of general government borrowing slowed but not on a downward trend.
- Public corporation borrowing: peak 95 percent of GDP in 2005, decreased to 62 percent of GDP in 2017.

### Cross-holdings and who finances public sector borrowing
- In 2017:
  - Public sector finances 150 percent of GDP of public sector borrowing.
  - Private sector finances 138 percent of GDP of public sector borrowing.
  - Therefore, 52 percent of public sector borrowing is financed by the public sector itself.
- Shifts in debtors financed by the public sector:
  - Until late 1990s, about half of public sector financing went to public corporations.
  - By recent years, almost all public sector financing is provided to the general government.
  - Share of public sector financing in public corporations’ borrowing declined from 75 percent in 1999 to 27 percent in 2017.
- Changes in public sector creditors:
  - FILF financed up to 77 percent of GDP of public sector borrowing at its peak in 1999; FILF financing fell sharply thereafter.
  - In the late 2000s, Post Bank and Insurance and SSFs financed up to 69 percent of GDP of public sector borrowing at their peak in 2009; their financing also fell quickly afterwards.
  - As a consequence of QQE, the BoJ is currently the largest public sector creditor, holding 82 percent of GDP of JGBs.

### Household savings, private demand for JGBs, and role of cross-holdings
- Household saving rates: above 10 percent until the 1990s, declined sharply after 2000, and "have remained very low in recent years (1.2 percent on average for the last five years)."
- Size of households’ financial assets held with commercial banks and insurance companies (major private buyers of JGBs) stabilized in recent years.
- Public-sector financing of public sector borrowing contributed to sustaining high public debt and low interest rates; balance sheet approach makes cross-holdings analysable.
- Changing implications since 2000: public sector investment practices have become more similar to private sector practices, reducing the role cross-holdings may play in sustaining high public debt and low interest rates.

### Investment management and behavior of four large financial public corporations (four FPCs: FILF, Post Bank and Insurance, SSFs, BoJ)
- Asset allocation changes:
  - At peak in 1998, 87 percent of total assets of the four FPCs were allocated to financing the public sector.
  - Post Bank reduced allocations to public sector financing from 95 percent of total assets at peak in 1998 to 33 percent in 2017.
  - Social security funds reduced allocations from 77 percent at peak in 1998 to 34 percent in 2017.
- Risk-taking and duration behavior:
  - Late 1990s (1998–1999): JGB market volatility increased; private sector shortened duration, while the four FPCs lengthened duration (increasing share in longer-term JGBs and reducing short-term Treasury bill holdings).
  - By 2001 the four FPCs reduced risk levels; since the 2000s the four FPCs and the private sector have broadly similar risk adjustments and duration increases.
- Portfolio management styles:
  - Until early 2000s, buy-and-hold strategies dominated (e.g., Post Bank held around 80 percent of JGB holdings as hold-to-maturity until mid-2000s; FILF held most JGBs to maturity and focused on outright purchases in secondary market in 1980s–1990s).
  - By 2017, Post Bank held only half of JGBs for maturity and sold around 10 percent of JGB holdings in some years to rebalance portfolios.
- Aggregate balance sheet shrinkage of public financial corporations:
  - Total balance sheets of FILF and Post Bank and Insurance shrank from 94 percent of GDP in 1999 to 55 percent of GDP in 2017.
  - Public sector financing of public sector borrowing decreased from 154 percent to 133 percent of GDP between 2005 and 2012.
  - During that period, general government borrowing increased from 168 percent to 220 percent of GDP, and private sector financing rose from 95 percent of GDP in 2005 to 163 percent of GDP in 2012.

### Policy application: FILF reform and its effects
- FILF system before reform:
  - FILF centralized investment of postal deposits at Post Bank and savings of public pension funds into the public sector; FILF managed by MoF.
  - Legal requirements: Post Bank and Employee Pension Fund loan all postal deposits and pension savings to FILF; FILF required to invest these funds into the public sector with very few exceptions. Post Insurance required to invest around 80 percent of total assets into the public sector, following FILF’s allocation.
- Balance sheet-driven expansion in 1990s:
  - Postal deposits at Post Bank rose from 30 percent of GDP in 1990 to 50 percent of GDP at peak in 1999.
  - Assets of Employee’s Pension Fund increased by 9 percent of GDP during the same period.
  - FILF total assets increased from 54 percent of GDP in 1989 to 85 percent of GDP at peak in 1999.
  - Post Insurance balance sheet increased by 12 percent of GDP.
  - These expansions explain an increase in public sector financing of public sector borrowing by 59 percent of GDP between 1990 and 1999.
- Trigger for FILF reform (initiated in 2000):
  - Reform aimed to address fiscal risks embedded in public sector financing of public sector borrowing arising from:
    - supply-side driven increase in public sector financing of public corporations;
    - transmission of fiscal risks through cross-holdings;
    - volatility of JGB markets caused by public sector purchase of JGBs outside the markets.
  - FILF reform caused subsequent changes in composition of public sector financing and portfolio management of public sector entities.

*Source: National accounts, flow of funds statistics, reports of individual entities, and IMF staff estimates.*

### 33.      The increasing supply of

### 33.      The increasing supply of financing from the FILF expanded the balance sheets of other public corporations and raised questions about their efficiencies.

### Impact on public corporations' balance sheets and fiscal costs
- Around half of the FILF’s assets were always allocated to financing of public corporations, leading the public corporation sector to experience the supply side driven increase of financing in the 1990s.
- Between 1990 and 1999, the balance sheets of public corporations other than the FILF, Post Bank and Insurance, and BoJ were enlarged by 36 percent of GDP.
- The increase in financing from the FILF and Post Insurance to financial public corporations raised the argument that the FILF was pumping excessive financing into public corporations that may not be profitable or efficient.
- Through the 1990s, major financial public corporations other than the FILF, Post Bank and Insurance, and BoJ were making losses on an aggregate basis, which were compensated by transfers from the government budgets.

### FILF as a transmitter of interest-rate risk
- Before the reform, the FILF charged the same interest on its borrowing and lending and was designed not to earn profits or losses.
- Mismatched maturities existed: postal term deposits (up to 10 years), loans from the Post Bank to the FILF (up to 7 years), and loans from the FILF to public corporations (up to 30 years).
- Market interest rates dropped from seven percent in 1990 to less than two percent in 1998 (average coupon rates of 10-year JGBs).
- As a result, the FILF earned significant profits while the Post Bank and other major financial public corporations made large losses; the FILF system on an aggregate basis remained at a break-even level, but losses accumulated at the Post Bank and financial public corporations were compensated by budget transfers.
- Appendix II (in source) describes details of interest rate risks faced by the FILF system.

### JGB market effects, public sector placement, and volatility
- Before the reform, the FILF purchased JGBs through “public sector placement” without participating in auctions or syndicates; amount and terms were determined internally within the same department of the MoF and were not fully transparent.
- Public sector placement stabilized JGB prices until the mid-1990s by making the amount of monthly JGB sales to the private sector constant through placing residuals with the FILF.
- In the late 1990s, the “FILF shock” (November 1998 announcement suggesting termination of public sector placement after January 1999) raised speculation and increased volatility: 10-year market rate spiked from 0.873 percent in November 10, 1998 to 2.395 percent in February 3, 1999.
- To stabilize markets, the FILF increased purchase of long-term JGBs in 1998 and 1999, lengthening durations of JGB portfolios of the four FPCs discussed in the source.

### FILF reform (2000) objectives and measures
- Reform objectives: (i) have the FILF and public corporations proactively finance themselves only for the needed amount on a market basis; and (ii) manage interest rate risks properly.
- Reform measures included: (i) abolishing legal requirements for the Post Bank and Insurance and social security funds to allocate assets to public sector financing; (ii) fading out the FILF’s purchase of JGBs and curtailing its financing of public corporations; and (iii) shifting public corporations to private sector financing.
- In May 2000, Parliament approved the law on the FILF reform, which was implemented gradually over the next seven years.

### Changes in public sector financing drivers after the FILF reform
- Public sector placement was abolished and used only as a transitional arrangement until 2007; public sector entities now purchase JGBs by joining auctions together with private sector investors.
- The FILF is no longer a predominant creditor: its balance sheet shrunk from 85 percent of GDP in 1999 to 23 percent of GDP in 2017.
- The Post Bank and social security funds became main creditors of public sector financing, increasing direct investments in JGBs in the 2000s.
- Public sector financing of public corporations decreased and their balance sheets began to shrink; public corporations (other than the Post Group and BoJ) are now financed mainly by issuing bonds in markets. Several public corporations were restructured or placed in the privatization process (example: Housing Loan Corporation converted into the Housing Finance Agency and reduced its borrowing from 13 percent of GDP in 2000 to 5 percent of GDP in 2016).

### Post Bank, social security funds, and market practices
- Since 2005, the Post Group has been in a privatization process requiring the Post Bank and Insurance to diversify portfolios and enhance profitability.
- The Post Bank and Insurance have been subject to the same regulations as commercial banks and insurers since 2008, requiring adherence to private sector risk management standards.
- Pension reforms in 2001 introduced a new investment framework for social security funds based on medium-term targets and portfolio management by the Government Pension Investment Fund (GPIF).
- In a low interest rate environment, the GPIF reduced allocation of the reference portfolio to domestic bonds, including JGBs, from 68 percent in 2001 to 35 percent in 2015.

### Demographic pressures, public pensions, and balance sheets
- Pressures from population aging have impacted Japan’s PSBS, particularly the balance sheets of public pension funds.
- Before the 2004 reform, public pension funds built up assets to avoid accelerating contribution rises or lowering benefits; government transfers to these schemes were around one percent of GDP every year.
- The public pension system is composed of two tiers:
  - Tier 1: National Pension — flat-rate; in 2016, pension payments of the National Pension are 4.2 percent of GDP.
  - Tier 2: Employee’s and Kyosai Pensions — partially funded, defined benefit; in 2016, pension payments of the Employee’s and Kyosai Pensions are respectively 4.4 and 1.1 percent of GDP.
- Projections based on 1989 demographic assumptions indicated the pre-reform policy would achieve a positive intertemporal balance of about 5 percent of GDP; at the peak of aging (2014) benefits would exceed contributions by 1.7 percent of GDP, requiring pension fund assets around 49 percent of GDP, coinciding with actual social security fund assets peak in 2005 (49 percent of GDP).

### Pension policy responses and asset management changes
- Population aging projections were revised upward: 1989 projections estimated OADR peak around 40 percent; 1995 census projections raised peak to around 60 percent; 2005 census projections raised estimated peak above 80 percent.
- After the FILF reform, public pension funds shifted to market investments; previously, around 70 percent of assets were loans to the FILF.
- Market exposure increased volatility of investment yields relative to pre-reform period.
- Key pension reforms since 2000 (summarized):
  - 2000 reform: gradual increase of pension eligibility age for the Employee’s Pension from 60 to 65 between 2001 and 2013.
  - 2004 reform: (i) increase in contribution rates of the National Pension and Employee’s Pension from 13.58 percent in 2003 to 18.30 percent in 2017 (Employee’s Pension case); (ii) introduction of “macroeconomic slide” adjustments to pension benefits every year until 2043; (iii) increase in budget transfer to public pensions from one-third to half of National Pension payments.
  - 2012 reform: (i) integration of the Kyosai Pension into the Employee’s Pension and increase in Kyosai contribution rates to Employee’s Pension level until 2018; (ii) financing of budget transfers to public pensions by an increase in consumer taxes.
- Between 2004 and 2016, contribution rates steadily increased while growth of average pension payment per pensioner was kept below wage growth.

### Long-run pension asset strategy and fiscal implications
- The 2004 reform sought to gradually reduce public pension fund assets over the next 100 years to the level of one year’s worth of pension benefits to avoid huge market exposures or market distortions.
- Financing of the current pension policy includes a large amount of budget transfers in the future.
- Present values (over the next 100 years, under current policy) for National and Employee’s Pension Schemes (2014 figures):
  - Contributions: 436% of GDP
  - Benefits: 654% of GDP
  - Returns/withdrawal of fund assets: 76% of GDP
  - Budget transfers: 142% of GDP

*Source: Excerpt from IMF staff estimates and supporting documents in the provided content unit.*

### 47.      Japan’s PSBS is one of the largest in the world and features a large negative net

### Japan’s PSBS is one of the largest in the world and features a large negative net financial worth of 165 percent of GDP

### Overview of public sector balance sheet (PSBS) findings
- Japan’s PSBS shows a large negative net financial worth of 165 percent of GDP.
- This negative net financial worth is created mainly by 288 percent of GDP of gross public sector borrowing built up over the last three decades.
- Public sector net worth declined from positive 97 percent of GDP at its peak in 1989 to around zero in recent years.
- The difference between net worth and net financial worth indicates that the majority of public sector assets are nonfinancial assets, which are illiquid and not easily marketable.

### Cross-holdings, financing structure, and implications for public debt management
- Cross-holdings size was 210 percent of GDP in 2017, arising because more than half of public sector borrowing was financed by the public sector itself.
- Creditor composition over time:
  - Until the 1990s: FILF was the predominant creditor.
  - Late 2000s: the Post Bank and Insurance and SSFs became the main creditors after the FILF reform in 2000.
- Risks from relying on public-sector financing of public-sector borrowing (historical sources and mechanisms):
  - FILF mechanism channeled postal deposits and pension savings into public sector financing and allowed MoF to issue and purchase JGBs outside markets.
  - Materialized fiscal risks embedded in the FILF system arose from:
    - Loss-making of public corporations.
    - Maturity mismatches generating skewed distributions of losses to the Post Bank and profits to the FILF.
    - Volatility of JGB markets.
- Post-FILF reform developments:
  - Volume of public sector financing experienced a gradual downward trend after 2000 overhaul.
  - The Post Bank, Insurance, and social security funds are managing portfolios to maximize risk-adjusted returns; they no longer provide low-cost public sector financing.
- Policy implication:
  - Because increasing public sector financing of public sector borrowing seems implausible, further borrowing by the public sector requires private sector financing, increasing the importance of market-based debt management.

### Demographics, intertemporal PSBS, and sustainability considerations
- Financing of current pension policy includes budget transfers of around 140 percent of GDP over 100 years.
- Population aging pressures on public health insurance funds:
  - Budget transfers to health insurance schemes increased from 1.2 percent of GDP in 1990 to 3.7 percent of GDP in 2016.
- Fiscal outcomes and pressures:
  - Primary deficits of general government have remained around 2½ percent of GDP over the last three years, even after the rise of consumption tax rates in 2014.
- Intertemporal assessment requirement:
  - Understanding sustainability of current fiscal policies requires assessment of intertemporal components of the PSBS, including present values of future revenues and expenditures and inclusion of pension-related present-value liabilities (intertemporal PSBS).

### Key actuarial and pension-related figures used in PSBS construction
- Methodology note: intertemporal PSBS adds present value of future pension benefits to liabilities and adds present value of future pension contributions and investment returns on pension fund assets to assets.
- Baseline actuarial case (Case E discounted by wage increase rates) for accrued-to-date pension obligations:
  - Total accrued-to-date pension obligations of the Employee’s Pension scheme: 1,330 trillion JPY.
  - Kyosai Pension share: 30 percent of GDP in 2014 (accrued-to-date pension obligations of Kyosai Pension were divided in proportion to numbers of current employees and pensioners).
  - Population counts reported for 2014:
    - Total current employees of Employee’s Pension scheme: 404 million persons.
    - Total pensioners of Employee’s Pension scheme: 375 million persons.
    - Current employees of Kyosai Pension: 44 million persons.
    - Pensioners of Kyosai Pension: 45 million persons.
  - Assumption: pension liabilities remain constant in terms of GDP throughout the time series.

### Definitions, coverage, and accounting identities used in PSBS compilation
- Institutional coverage: PSBS combines balance sheets of:
  - General government (central government and local governments), social security funds, nonfinancial public corporations, the central bank (Bank of Japan), and other financial public corporations.
- Stock coverage: includes all nonfinancial and financial assets owned and owed by the public sector. Net assets of public corporations (difference between assets and non-equity liabilities) are included as public corporations’ liabilities and general government financial assets; public corporations record no net worth.
- Flow coverage: dataset includes main flow aggregates, separating transactions (revenue, expense, net investment in nonfinancial assets, net acquisition of financial assets, net incurrence of liabilities) and other economic flows (holding gains and losses, other changes in volume).
- Key accounting identities preserved exactly:
  - Net Worth = Assets – Liabilities
  - Net Financial Worth = Financial Assets – Liabilities
  - Net Lending or Borrowing = Revenue – Expense – Net Investment in Nonfinancial Assets
  - Net Worth1 = Net Worth0 + Transactions affecting Net Worth1 + Changes in Net Worth due to Other Economic Flows1
  - Net Worth1 – Net Worth0 = Net Lending/Net Borrowing1 + Net Acquisition of Nonfinancial Assets1 + Other Economic Flows1

### Data sources and supplements used for Japan’s PSBS
- Main data source: annual national accounts published by the Cabinet Office (flow and stock data from the 2017 annual national accounts used).
- Supplementary data sources for items not in annual national accounts:
  - Consolidations and cross-holdings: Flow of Funds Statistics published by the BoJ and financial statements of individual public sector units.
  - Nonfinancial assets of central and local governments: Annual Financial Statements of the State (General and Special Accounts); local government nonfinancial assets derived as general government nonfinancial assets minus social security funds and central government nonfinancial assets.
  - Pension liabilities: Annual Financial Statements of the State (General and Special Accounts) and government actuarial estimates (latest data available for 2014).
  - Central Bank (BoJ) balance sheet: Flow of Funds Statistics and BoJ annual financial statements.

### Distributional implications across municipalities
- Net worth per capita distribution across municipalities is U-shaped; least populated municipalities have the largest net worth per capita (Chiba Prefecture, 2016 data).
- Cause: intergovernmental transfer mechanisms concentrate per-capita transfers to smaller municipalities, enabling greater infrastructure accumulation and higher net worth per capita.
- Consequences:
  - Uneven distribution creates intergenerational equity issues: residents of small municipalities can receive more benefits from infrastructure and incur less debt costs than residents of large municipalities.
  - Medium-sized municipalities, receiving less transfers per capita, face larger fiscal consolidation needs and may need to reduce public investments and net worth.
  - Risk of “fiscal illusion”: governments may lower immediate debt and deficits while reducing net worth over time.

### Historical background and interest-rate risks of the FILF, Post Bank, and social security funds
- FILF origins and role:
  - Created in 1951 to manage and invest funds from postal deposits, public pension funds, and surplus of special accounts.
  - Function shifted to financing public corporations and local governments; became a major investor in JGBs, holding between 20 and 40 percent of outstanding JGBs until its reform in 2000.
- 1990s FILF balance-sheet composition (summary):
  - Liabilities side: mostly financed by loans from the Post Bank and public pension funds; Post Bank and pension funds were required by law to loan deposits and pension savings to FILF.
  - Asset side: FILF made loans to and held debt securities of general governments and public corporations; in the 1990s financing of general governments and public corporations each comprised about half of FILF asset portfolio; funds borrowed back by Post Bank and public pension funds increased to 21 percent of FILF’s total assets in 2000.
- Interest and maturity characteristics (2000 snapshot):
  - FILF charged and paid interest roughly at: 10 year JGB coupon rate + 0.2 percent (for loans from FILF to CG, LGs, PCs; and loans from Post Bank and SSFs to FILF).
  - Postal term deposits paid market rates; maturities up to 10 years with put options without penalties after 3 years; FILF loans maturity 6 to 30 years; borrowing from Post Bank and SSFs up to 7 years.
- Materialization of interest-rate risks after liberalization:
  - Financial liberalization in early 1990s and asset-price bubble collapse led to a sharp drop in interest rates, exposing duration mismatches:
    - Post Bank: postal term deposits had 10-year maturity with put option after 3 years; depositors often held deposits until 10-year maturity during falling rates (term deposits made in 1990 with 6.33 percent interest were kept until 2000), while loans to FILF made in 1990 with 7.0 percent interest had seven-year maturity and were replaced with new loans at 2.4 percent in 1997, creating negative interest margins at the Post Bank between 1998 and 2000.
    - FILF: borrowing from Post Bank and SSFs had shorter maturity (seven years) than its lending to public corporations (up to 30 years), creating positive interest margins for the FILF as expensive borrowing made in 1990 was replaced with cheaper borrowing in 1997 while long-term loans continued to yield higher interest.
    - Public corporations: suffered high interest costs of long-term borrowing from FILF because law prevented refinancing before maturity; several public corporations required large transfers from the central government to compensate losses.

*Source: Excerpt from wpiea2019212-print-pdf (Japan’s PSBS chapter).*

### 62.       Term deposits with high interest rates also caused the expansion of the Post

### Term deposits with high interest rates also caused the expansion of the Post Bank balance sheet through redepositing of accrued interest in the 1990s

### Expansion of Post Bank balance sheet and accrued interest
- The total amount of postal deposits interests accrued between 1989 and 1999 reached 18 percent of GDP.
- Most of these interests were paid on the 10-year term deposits, which comprised 90 percent of total postal deposits during the same period.
- Figure 33 shows that the size of new deposits and accrued interest were much larger than withdrawal of postal deposits throughout the 1990s.

### Depositor behavior and interest-rate environment in the 1990s
- Deposit patterns imply that the depositors largely redeposited accrued interests and matured deposits in an environment where an interest rate fell rapidly.
- High interest rates on term deposits contributed to expansion of deposits via redepositing of accrued interest.

### Changes in the 2000s and core depositors
- In the 2000s, interest rates on postal term deposits fell to the same level of commercial bank deposits.
- Several depositors with preference for high interests did not redeposit but withdrew matured deposits.
- As a result, the level of deposits decreased back to the level of the late 1980s, which appear to show the core depositors who keep postal deposits for reasons other than interest rates.

### Additional note
- An extensive branch network is considered one reason that supports competitive advantages of Post Bank.43

*Source: Annual Financial Statements of Postal Deposit Special Accounts and Post Bank; excerpt from wpiea2019212-print-pdf.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019212-print-pdf.pdf_