## _cr12262

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### Government support programs and overall credit conditions (2008–2011)
- Overall credit conditions in Japan have eased but credit demand remains inert.
- Swift policy actions helped prevent a tightening of financing condition and widespread bankruptcies.
- Factors that could impede the credit channel:
  - selected public credit support measures and expanding role of government-affiliated financial institutions (GFIs);
  - structural weakness of small- to medium-sized enterprises (SMEs);
  - risk-averse market practices on collaterals and risk-based financing;
  - financial positions of regional and shinkin banks; and
  - some institutional and regulatory factors.
- GFIs’ presence shrank from 21 percent to 11 percent of total assets in the financial system as of end-FY2010 (excluding Japan Post Bank (JPB) and Insurance (JPI)), but they remain active in credit intermediation.
- JPB and JPI channel considerable private savings to investment securities (of which over 80 percent are Japanese government bonds (JGBs)), although these two institutions do not extend credit.
- Debt financing accounts for nearly 60 percent of corporate finance; most credit is channeled through the banking system (about ¥238 trillion or 50 percent of GDP).
- Corporate bonds outstanding about ¥60 trillion and commercial papers about ¥10 trillion.
- Bank capital adequacy ratio about 14 percent.
- Private sector funding costs declined to about 1 percent amid monetary easing and intensified competition.
- Corporate surpluses rose to about 6 percent of GDP.

### Credit demand, supply, and market functioning
- Loan-to-deposit ratio at historical low at less than 70 percent.
- Diffusion index on credit demand remains negative in the Tankan survey; subdued demand due to weak growth prospects, strong yen, and high corporate surpluses.
- Capital expenditures for business fixed investment account for less than 30 percent of total credit demand.
- Bank lending has somewhat picked up reflecting reconstruction demand, pickup in housing loans, and banks’ overseas expansion.
- Securitization market remains below pre-crisis levels; risk-based capital (private equity and venture capital) remains very limited.
- Corporate bond spreads returned to pre-crisis levels (e.g., less than 1½ percent for AA-rated).
- Equity market remains subdued.

### Household sector responses and retail financial innovation
- Household financial assets nearly ¥1,500 trillion as of 2010, over five times nominal disposable income.
- An estimated one-percentage point increase of real interest rate would increase deposit to financial asset ratio by two percentage points for the elderly between 60 and 70 born during 1940–44 (Appendix A).
- Households shifted savings toward new retail products: investment trusts, J-REITs, ETFs/ETNs, retail FX margin trading.
- Private financial institutions (mainly banks) provide about 82 percent of total mortgages.
- More than half of outstanding mortgages are in short-term floating rate at one- to two-year duration.
- Share of mortgages in total liabilities about 50 percent (lowest among G7).
- House price to income ratio has continued to decline; residential property comparatively affordable.

### Corporate sector, low interest rates, and heterogeneity (section 8)
- Interest cost stable at 1.5–2.5 percent of borrowings for large corporations and SMEs.
- Total interest payment has fallen as firms deleveraged.
- Debt-equity responsiveness to borrowing cost (controlling for sector and capital size):
  - A 10 basis point decline of borrowing cost reduces the debt-equity ratio by 6.5 percentage points for nonmanufacturing firms.
  - A 10 basis point decline of borrowing cost reduces the debt-equity ratio by 4 percentage points for manufacturing firms.
- Low interest rates likely contributed to yen carry trades prior to the global financial crisis (about ¥1 trillion), largely unwound thereafter.
- Issuance of asset backed securities (ABS) less than one-third of pre-crisis 2006 level, except consumer credits.
- JHF’s RMBS issuance increasing market share; CMBS issuance negligible.
- Net interest margin on loans around 0.6–1.2 percent now vs about 1.2–2.1 percent in early 2000s.
- Interest income accounts for more than two-thirds of banks’ total income.
- Banks’ return on assets below 1 percent in past few years.
- Overseas exposures increased from about ¥20 trillion to about ¥33 trillion (adjusted for FX) during September 2007–2011.
- Net interest margin for overseas lending about 1–3 percent.
- Regional and shinkin banks shifting focus to growth sectors, long-term customers, loans outside home prefectures, large metropolitan firms, and local governments; shinkin banks face amplified challenges.

### Government support measures and scale (section 8)
- Multiple policy measures: SME Financing Facilitation Act, relaxation of loan classification criteria, safety-net lending, expansion of credit guarantees; BOJ lending facility for growth sectors and disaster areas.
- Credit guarantees about 3 percent of GDP each year.
- Loans with credit guarantees rose sharply to about 8 percent of GDP as of end-FY2010.
- Benefits observed:
  - More than 60 percent of financial institutions find SME Financing Facilitation Act helps improve lending attitudes.
  - Empirical studies find credit guarantee programs improved credit availability to existing SMEs.
  - Nearly half of SMEs used counter-cyclical guarantees to bolster liquidity; more than one-fifth extended guarantee terms.
  - Overall nonperforming loans ratio stable at about 2 percent after the global financial crisis and the disaster.
  - Bankruptcies declined by an average of 12 percent after the peak of the Lehman crisis; corporate exit rate remains low at 4–5 percent.
  - GFIs channeled nearly 10 percent of SME credit.

### Costs, risks, and unintended consequences of support measures
- Direct fiscal cost: capital injections to GFIs and sizeable credit support measures amid gross public debt above 200 percent of GDP.
- Indirect fiscal cost: contingent liabilities from reinsuring credit guarantees and funds for GFIs’ further capital injections.
- Loan reclassification has likely understated actual credit risks: about ¥12.5 trillion of doubtful and substandard assets were classified as normal.
- If firms with restructured loans cannot recover, banks’ nonperforming loans could rise by about 1 percentage point (Bank of Japan, 2012).
- Reclassification issues more severe among regional banks and credit cooperatives: about 3–6 percent of total credit reclassified under the Act vs 1.7 percent in major banks.
- Widespread credit guarantees could:
  - reduce credit availability for nonguaranteed loans;
  - limit banks’ incentives for risk assessment;
  - increase credit linkages among regional banks, SMEs, and local governments.
- Prior special guarantee program cost estimate: about ¥2.1 trillion or ½ percent of GDP in the late 1990s and early 2000s.
- Over half of SMEs did not apply for loan modification due to concerns about negative impact on future borrowing.
- Credit support measures may keep nonviable SMEs afloat, limiting incentives for SME restructuring; exit and business transfer rates remain low despite weak SME profitability.

### Fiscal contingent liabilities and GFI reform challenges (section 19)
- Potential contingent liabilities from:
  - losses from credit guarantees through fund-provision to Japan Finance Corporation’s reinsurance;
  - subsidies for compensation assets in National Federation of Credit Guarantee Corporation (FCGC) and other CGC funds.
- Potential scale: these contingent liabilities "could reach ¥1 trillion."
- Delays and uncertainty on the GFI reform agenda could undermine GFI business strategies and create supervision difficulties.
- Fiscal and legal asymmetries among GFIs:
  - Several GFIs (excluding the Japan Post Bank and Insurance) are not subject to corporate tax.
  - Some GFIs’ lending rates vary below market costs.
  - Several GFIs not subject to capital requirements under respective acts.
  - Inspections infrequent: about once every two to three years.
  - Supervision often joint by multiple ministries; inspection authority mostly delegated to the FSA after 2002 reform.
- Privatization timing and extensions:
  - Scope and timing for full privatization of Japan Post fully suspended in 2009.
  - Commencement phase for full privatization of SCB and DBJ extended; government reserved rights to review the process by end-FY2014.

### Structural weakness of SMEs (section 19)
- SMEs account for nearly 70 percent of total employment and about 53 percent of manufacturing value-added.
- Leverage and profitability:
  - Debt-equity ratio for SMEs "250–300 percent; 2.5 times higher than large corporations."
  - Return on assets (ROA) for SMEs around "1 percent", compared with "about 5 percent" in Germany and "3 percent" in France.
  - Interest coverage ratio for SMEs has been below 1.
- Sector/size averages (from Table 3, averages from 2000):
  - Debt equity ratio (overall): "222.1"; Large: "168.2"; Medium: "278.9"; Small: "307.3".
  - Return on assets (overall): "0.8"; Large: "0.9"; Medium: "0.9"; Small: "0.7".
  - Interest rate coverage (in times) (overall): "1.0"; Large: "1.2"; Medium: "1.0"; Small: "1.0".
  - Adjusted net profit margin (overall): "3.3"; Large: "6.2"; Medium: "1.6"; Small: "1.5".
  - Labor productivity (value-added per employee) (overall): "0.3"; Large: "0.8"; Medium: "0.3"; Small: "0.2".
- Regression evidence:
  - A one-percentage point increase of debt-equity ratio reduces the adjusted net profit margin by about "0.2 percentage points".
  - Long-run net profit margin affected by high leverage and weak productivity at the "5 percent" significance level.
- SMEs have been deleveraging over the past decade, particularly nonmanufacturing firms; firm turnover rate about one-third of that in the United Kingdom and the United States.

### Market practices, collateral, and risk-based financing
- Banks prefer fixed-asset collaterals (real estate) and personal guarantees.
- METI survey: over a quarter of SMEs consider personal guarantees improve trust and ease credit but pose obstacles to business transfers.
- Asset-based lending (ABL) promoted by SMRJ, CGC, JFC; BoJ established a credit facility "as much as ¥½ trillion" to support risk-based lending using business-to-business credits as collateral.
- ABL not well established due to difficulties assessing fair value of assets.
- Start-ups rely predominantly on self-finance; venture capital is low (Japan ranks second to last in venture capital investment as a share of GDP among OECD).
- IPOs, mergers and acquisitions provide exit venues but are inadequate, limiting risk-based capital.

### Electronic registration on claims and SME financing (section 26)
- Electronically Recorded Monetary Claims (ERMC) stipulates rights on claims, saves custody cost for pledged bills/notes, and avoids double assignment risk.
- ERMC could uplift banks’ financing by reforming lending operations to SMEs and expanding as a settlement facility and for securitization of syndicated loans.
- Development at early stage; banks face sizeable investment and operating costs (converting receivables to electronic claims).
- FSA and Ministry of Justice enacted electronic registration in December 2008 (Act on Electronically Recorded Monetary Claims, ERMC); several recording institutions’ registries established.
- Securitization of SME loans not common given low interest rates and difficulties transferring personal guarantees.
- Authorities and large corporations could lead in utilizing electronic claims to promote origination and trading.

### Financial position of regional and shinkin banks (section 26)
- Asset quality improved over past decade but deteriorated during the financial crisis: NPL ratio rose to over 3 and 6 percent for regional and shinkin banks, respectively.
- NPLs could be understated under relaxed loan classification requirements.
- Preliminary estimates: about 17–32 percent of credit in regional and shinkin banks are with guarantees, relative to 4 percent in city banks.
- Weak financial positions may reduce incentives to restructure nonviable SME loans.
- Regional and shinkin banks’ relationship-based banking reduces monitoring costs but close ties increase credit concentration risks and may induce substitution towards guaranteed loans.

### Estimated share of credit guarantees for SMEs, by bank types (in trillions of yen)
- Private banks: Outstanding amount 229.19; Share (in perecnt) 90.4; Estimated outstanding guarantees 35.1; Share of credit with guarantees (in percent) 15.3
- City banks: Outstanding amount 78.33; Share (in perecnt) 30.9; Estimated outstanding guarantees 2.9; Share of credit with guarantees (in percent) 3.7
- Regional banks: Outstanding amount 66.12; Share (in perecnt) 26.1; Estimated outstanding guarantees 11.2; Share of credit with guarantees (in percent) 17.0
- Regional banks tier 2: Outstanding amount 23.5; Share (in perecnt) 9.3; Estimated outstanding guarantees 5.0; Share of credit with guarantees (in percent) 21.3
- Trust bank and long-term credit banks: Outstanding amount 10.6; Share (in perecnt) 4.2; Estimated outstanding guarantees 0.4; Share of credit with guarantees (in percent) 3.7
- Credit associations: Outstanding amount 41.3; Share (in perecnt) 16.3; Estimated outstanding guarantees 13.2; Share of credit with guarantees (in percent) 32.0
- Credit cooperatives: Outstanding amount 9.3; Share (in perecnt) 3.7; Estimated outstanding guarantees 2.3; Share of credit with guarantees (in percent) 24.9
- with credit guarantees 1/: 35.1; 13.8
- Other money lenders: Outstanding amount 2.9; Share (in perecnt) 1.1; Estimated outstanding guarantees n.a.; Share of credit with guarantees (in percent) n.a.
- Government financial institutions (GFIs): Outstanding amount 21.4; Share (in perecnt) 8.4; Estimated outstanding guarantees n.a.; Share of credit with guarantees (in percent) n.a.
- Total: Outstanding amount 253.4; Share (in perecnt) 100.0; Estimated outstanding guarantees 35.1
- Source: SME Agency, Morgan Stanley Research, and staff estimates. Note: 1/ From national credit guarantee corporation as of end-FY2010.

### Institutional and regulatory factors affecting investment and startups
- Starting a business is more difficult in Japan relative to other G7 and selected Asian economies (duration and costs).
- Firm entry and exit rates much lower than other advanced countries; business transfer rate low and declined recently.
- Credit information: multiple registries exist (CRD, RDB, CRITS, SDB) but over half of survey respondents consider information availability limited; no centralized consumer credit bureau.
- Large share of public pension assets invested in JGBs; reallocating a small fraction toward venture capital and private equity could improve long-term returns and channel funds to private investment.
- FSA amended Cabinet Office Ordinance in 2010 to add new stock subscription rights and loans, including subordinated loans, as means for specialized investment subsidiaries of banks and insurance companies.

### Policy recommendations and reform priorities
- Better-targeted credit support programs and timely phase-out of selected temporary measures.
  - SME Financing Facilitation Act should be set to expire as scheduled by March 2013 to mitigate costs likely to exceed benefits.
- Credit guarantees:
  - Phase out special and counter-cyclical credit guarantees of up to 100 percent gradually as recovery takes hold.
  - Over time, reduce the normal guarantee coverage ratio to about 60 percent.
  - Use a step-wise approach; consider raising guarantee fees over the usage period and scrutinize rollover possibilities.
- Redirect GFI funds toward start-ups and high growth areas; encourage public-private partnerships (PPP).
- Advance privatization momentum for GFIs (including Japan Post); improve transparency, accountability, and harmonize taxation, accounting, interest setting, and regulatory requirements.
- Strengthen supervision of GFIs: streamline ministerial responsibilities and more frequent inspections by the FSA.
- Accelerate SME restructuring:
  - Promote wider use of debt-equity swaps, pre-packs, out-of-court voluntary workouts.
  - Consider establishing an asset management company (AMC) tailored to SMEs.
  - For in-court restructuring, consider debtor-in-possession arrangements.
- Facilitate financing and risk-based lending:
  - Encourage wider use of electronic registration on claims and risk-based financing.
  - Promote a shift from fixed-asset collaterals and personal guarantees toward asset-based lending.
  - Promote securitization of SME loans and venture capital to diversify market-based financing.
- Strengthen regional and shinkin banks:
  - Upgrade risk management, reduce credit and market risk exposures, diversify client bases.
  - Consider gradual consolidation based on private business decisions to improve profitability and resilience.
  - Strengthen supervision to account for impacts when temporary measures are withdrawn.
- Regulatory reforms:
  - Streamline regulations to reduce duration and cost of starting businesses.
  - Encourage long-term institutional investors (pension funds) to provide risk-based capital.
  - Broaden coverage of credit registries through a more centralized database and consider a consumer data bureau.

### Appendix I — Household portfolio regression analysis (highlights)
- Data: Household Savings Survey (Postal Office Research Institute), bi-annual 1988–2004; total observations 36,217; usable sample 24,593 after excluding missing characteristics.
- Method: Tobit censored regression with dependent variables: ratios of deposits, stocks and investment trust, and life insurance to total financial assets; controls include age dummies (10-year groups), cohort dummies (10-year birth cohorts), year dummies or market condition variables, income, education, household size, and city size dummies.
- Key empirical findings:
  - Aggregate: more than half of household financial assets held as deposits.
  - Age patterns: deposit proportion decreases initially (bottoms around 30s–40s) then increases with age; age dummies statistically significant at 5 percent.
  - Cohort patterns: households born after 1970 allocate more to deposits and less to risky investments than earlier cohorts.
  - Market responses: real deposit rate coefficients positive for deposit ratios and negative for equities/investment trusts (statistically significant at 5 percent).
  - Socioeconomic effects: households in larger cities or with higher education allocate more to risky assets.
- Selected regression outputs (examples preserved as in source):
  - Observations: 24,593; Uncensored Observations: 18,812; Log likelihood: -15,275.83 (one specification).
  - Age dummy examples: Dage under 30: 0.067; Dage 30s: -0.052; Dage 40s: -0.075; Dage over 70: 0.071.
  - Cohort dummy examples: Dcohort 1970_74: 0.08; Dcohort 1975_84: 0.308.
  - Market condition examples: Real Interest Rate of Deposits: 0.023; Volatility of Stocks: -0.004.
- Interpretation: age and cohort dynamics, market conditions, and socioeconomic characteristics shape household portfolio allocation; implications for financial education and policies to broaden investment channels.

### Appendix Table 2 — SME definition under SME Basic Act (industry thresholds)
- Industry-specific thresholds (capital; regular employees; of which: small enterprises thresholds):
  - Manufacturing, construction, transport, and other industries — up to ¥300 million — up to 300 — up to 20
  - Wholesale — up to ¥100 million — up to 100 — up to 5
  - Retail — up to ¥50 million — up to 50 — up to 5
  - Services — up to ¥50 million — up to 100 — up to 5
- Sources: SME Agency, METI.

*Source: Excerpts and staff analysis from the provided IMF chapter content (_cr12262).*

### 1. Government Support Programs to Facilitate SMEs Financing, 2008–2011 ........................17

### 1. Government Support Programs to Facilitate SMEs Financing, 2008–2011 ........................17

### Major findings on credit conditions and government support
- Overall credit conditions in Japan have eased but credit demand remains inert.
- Swift policy actions helped prevent a tightening of financing condition and widespread bankruptcies.
- Aspects that could impede well-functioning of the credit channel include:
  - selected public credit support measures and expanding role of government-affiliated financial institutions;
  - structural weakness of small- to medium-sized enterprises (SMEs);
  - risk-averse market practices on collaterals and risk-based financing;
  - financial positions of regional and shinkin banks; and
  - some institutional and regulatory factors.
- GFIs have played a key role in facilitating credit. GFIs’ presence shrank from 21 percent to 11 percent of total assets in the financial system as of end-FY2010 (excluding Japan Post Bank (JPB) and Insurance (JPI)), but they remain active in credit intermediation by implementing policy directives and facilitating credits to firms that face financial constraints.
- JPB and JPI channel considerable private savings to investment securities (of which over 80 percent are Japanese government bonds (JGBs)), although these two institutions do not extend credit.
- Debt financing accounts for nearly 60 percent of corporate finance, with most credit channeled through the banking system (about ¥238 trillion or 50 percent of GDP).
- Direct access of large corporations to capital markets: corporate bonds outstanding about ¥60 trillion and commercial papers about ¥10 trillion.
- Bank capital adequacy ratio is high at about 14 percent.
- Private sector funding costs declined to about 1 percent amid monetary easing and intensified competition.
- Corporate surpluses rose to about 6 percent of GDP.

### Evidence on credit demand, supply, and market functioning
- Loan-to-deposit ratio is at historical low at less than 70 percent.
- Diffusion index on credit demand remains negative in the Tankan survey; credit demand subdued due to weak growth prospects, strong yen, and high corporate surpluses.
- Capital expenditures for business fixed investment account for less than 30 percent of total credit demand.
- Bank lending has somewhat picked up recently reflecting reconstruction demand, pickup in housing loans, and banks’ overseas expansion.
- Securitization market has yet to recover to pre-crisis levels; availability of risk-based capital, such as private equity and venture capital, remains very limited.
- Corporate bond spreads returned to pre-crisis levels (e.g., less than 1½ percent for AA-rated).
- Equity market remains subdued.

### Household sector responses and retail financial innovation
- Household financial assets nearly ¥1,500 trillion as of 2010, over five times nominal disposable income, highest among G7 countries; assets are mostly held in cash and deposits.
- Household asset allocation is responsive to asset returns: an estimated one-percentage point increase of real interest rate would increase deposit to financial asset ratio by two percentage points for the elderly between 60 and 70 born during 1940–44 (Appendix A).
- Households have shifted savings toward new retail financial products (investment trusts, J-REITs, ETFs/ETNs, retail FX margin trading).
- Private financial institutions, mainly banks, provide about 82 percent of total mortgages.
- More than half of outstanding mortgages are in short-term floating rate at one- to two-year duration.
- Share of mortgages in total liabilities remains the lowest among G7 countries at about 50 percent.
- House price to income ratio has continued to decline and residential property is comparably affordable relative to other advanced countries.

### Corporate sector and capital structure under low interest rates
- Corporate capital structure has shifted towards internal financing; internal financing ratio increased from 60 percent to 150 percent during FY2008–FY2010.
- External financing through capital increases has been consistently negative (on average about ¥5 trillion per year) for the past decade due to weak equity markets.
- Nonfinancial corporations’ debt remained relatively high among G7 (private sector credit from banking sector, end-2010, Japan high relative to peers).
- Firms, particularly nonmanufacturing, have continued to deleverage; bank lending to large corporations somewhat improved but remains weak for SMEs.

### Impact of low interest rate environment on credit intermediation
- Low nominal interest rate environment has persisted for nearly a decade and is likely to remain over the medium term (IMF, 2012).
- Lingering deflation tends to limit the decline of real interest rate, reducing stimulus to credit demand.
- Accommodative lending attitudes have contributed to downward trend in private sector funding costs to about 1 percent.
- Despite easing financial conditions, some SMEs and households face financial constraints.

### Policy recommendations and reform priorities
- Financial sector policies should aim to improve credit intermediation and revive credit demand by:
  - better-targeted credit support programs;
  - advancing reforms in government-affiliated financial institutions (GFIs) and SME restructuring;
  - encouraging electronic registration on claims;
  - promoting risk-based financing; and
  - strengthening regional and shinkin banks’ risk management.

*Source: IMF staff analysis in "Government Support Programs to Facilitate SMEs Financing, 2008–2011," extracted from the provided chapter content.*

### 8. Low interest rates have reduced corporate interest cost and the impact varies

### 8. Low interest rates have reduced corporate interest cost and the impact varies

### Corporate interest costs and heterogeneity across firms and sectors
- Interest cost has been stable at 1.5–2.5 percent of borrowings for large corporations and SMEs.
- Total interest payment has fallen as firms deleveraged.
- Lending conditions have eased across firms (including SMEs) but appear to vary across firm size and sector.
- Preliminary estimates from corporate financial statements indicate debt ratios are less responsive to interest rates for manufacturing firms and large firms:
  - A 10 basis point decline of borrowing cost would reduce the debt-equity ratio by 6.5 percentage points for nonmanufacturing firms, after controlling for sector and capital size.
  - A 10 basis point decline of borrowing cost would reduce the debt-equity ratio by 4 percentage points for manufacturing firms, after controlling for sector and capital size.
- Possible explanations noted:
  - SMEs and nonmanufacturing firms are more financially constrained.
  - Large corporations are less dependent on debt financing and have a higher return on assets to build up internal funds.

### Low interest rates, yen carry trades, and securitization activity
- Low interest rates likely contributed to yen carry trades prior to the global financial crisis (about ¥1 trillion), which have largely been unwound as interest differentials narrowed.
- Weak credit demand and low interest rates have limited the need for banks to securitize through capital markets.
- Overall issuances of asset backed securities (ABS) are less than one-third of the pre-crisis level in 2006, except in consumer credits.
- JHF’s issuance of residential mortgage-backed securities (RMBS) has an increasing market share as banks diversify interest rate risks on housing loans.
- Commercial mortgage-backed securities (CMBS) issuance is negligible, reflecting a sluggish commercial property market and limited investor participation.

### Banks’ business models and profitability under low interest rates
- Shrinking net interest margin on loans: around 0.6–1.2 percent now relative to about 1.2–2.1 percent in the early 2000s.
- Interest income accounts for more than two-thirds of total income for banks; low margins limit core profitability.
- Banks’ return on assets has stayed below 1 percent in the past few years, lower than that of international banks.
- Low core profitability undermines banks’ ability to build retained earnings against shocks and to dispose of bad loans.
- Gains and losses on securities are generally more volatile than net interest income, potentially increasing profit volatility for banks.
- Adjustments in business models and outcomes:
  - Major banks: Overseas expansion has been pursued as domestic credit demand remains sluggish.
    - Overseas exposures increased from about ¥20 trillion to about ¥33 trillion (adjusted for foreign exchange (FX)) during September 2007–2011.
    - Net interest margin for overseas lending is about 1–3 percent, not higher than domestic margins due to intense competition and higher funding costs overseas.
  - Regional and shinkin banks: Focus shifting to credit to growth sectors (e.g., nursing units, supermarkets), long-term customers, loans outside home prefectures, large metropolitan firms, and local governments.
    - Prospects closely tied to regional economic developments; banks in prospering prefectures fare better.
    - Shinkin banks face amplified challenges due to smaller size, higher share of risky small business loans, and concentration risks.
  - Foreign banks: Low interest rates and intense competition have contributed to a declining presence of foreign banks in Japan.

### Mortgage lending and domestic loan rates
- Major and regional banks have increasingly focused on mortgage lending, offering preferred discount loans with lower base rates such as adjustable rate mortgages.
- Intensifying competition on housing loans and in metropolitan areas has driven down domestic loan rates.

### Government’s role in the financial system and credit intermediation
- Multiple policy measures enacted: SME Financing Facilitation Act, relaxation of loan classification criteria, safety-net lending, and expansion of credit guarantees. The BOJ introduced a lending facility on growth sectors and disaster areas.
- Financial support measures in Japan are broader in scope and larger in scale relative to other advanced countries (excluding disaster-related measures):
  - Credit guarantees account for about 3 percent of GDP each year.
  - Loans with credit guarantees rose sharply to about 8 percent of GDP as of end-FY2010.
- GFIs (government financial institutions):
  - Their share of financial system assets has halved in the past decade, falling to 11 percent as of end-FY2010 (excluding JPB and JPI), but they remain active in credit intermediation and implementing policy directives.
  - JPB and JPI channel sizeable private savings and invest about 80 percent in JGBs.
- Benefits of support measures:
  - More than 60 percent of financial institutions find that the SME Financing Facilitation Act helps improve lending attitudes.
  - Empirical studies find credit guarantee programs improved credit availability to existing SMEs.
  - Nearly half of SMEs used counter-cyclical guarantees to bolster liquidity; more than one-fifth extended guarantee terms.
  - Overall nonperforming loans ratio has remained stable at about 2 percent after the global financial crisis and the disaster, despite large falls in output.
  - Bankruptcies declined by an average of 12 percent after the peak of the Lehman crisis; corporate exit rate remains low at 4–5 percent.
  - GFIs channeled nearly 10 percent of SME credit, ameliorating adverse shocks.

### Costs, risks, and unintended consequences of support measures
- Fiscal costs:
  - Direct fiscal cost includes capital injections to GFIs and sizeable credit support measures, adding to fiscal burden as gross public debt level reaches above 200 percent of GDP.
  - Indirect fiscal cost includes contingent liabilities from reinsuring credit guarantees and funds provided to GFIs for further capital injections.
- Weakening of credit risk assessment:
  - Measures for loan reclassification have likely understated actual credit risks.
  - About ¥12.5 trillion of doubtful and substandard assets were classified as normal.
  - If firms with restructured loans cannot recover, banks’ nonperforming loans could rise by about 1 percentage point (Bank of Japan, 2012).
  - The problem appears more severe among regional banks and credit cooperatives: a higher proportion of their loans is reclassified under the Act (about 3–6 percent of total credit in regional banks and credit cooperatives relative to 1.7 percent in major banks).
- Widespread credit guarantees could weaken credit intermediation by:
  - Reducing credit availability for nonguaranteed loans (as banks switch to guaranteed loans).
  - Limiting banks’ incentives for risk assessment.
  - Increasing credit linkages among regional banks, SMEs, and local governments.
- Prior special guarantee program cost estimate:
  - Cost around ¥2.1 trillion or ½ percent of GDP in the late 1990s and early 2000s (Koo and Sasaki, 2010).
- Other indirect costs and distortions:
  - Over half of SMEs did not apply for loan modification due to concerns about negative impact on future borrowing.
  - Credit support measures may keep nonviable SMEs afloat and limit incentives for SME restructuring, evidenced by low exit and business transfer rates despite weak SME profitability.

*Source: IMF staff summary of section 8 from the provided IMF chapter content.*

### 19. The presence of GFIs in credit intermediation could add contingent liabilities to

### _cr12262 - 19. The presence of GFIs in credit intermediation could add contingent liabilities to

### Fiscal contingent liabilities from GFIs
- The government could face contingent liabilities from:
  - losses from credit guarantees through fund-provision to Japan Finance Corporation’s reinsurance;
  - subsidies for compensation assets in National Federation of Credit Guarantee Corporation (FCGC) and other CGC funds (in-text figure).
- Potential scale: these contingent liabilities "could reach ¥1 trillion."
- Delays and uncertainty on the GFI reform agenda could:
  - further undermine some GFI’s business strategies in achieving their mandates;
  - create difficulties in supervision (Appendix C).
- Higher share of loans channeled by public financial institutions tend to:
  - hinder capital market development to supply risk money; and
  - prevent exit of less competitive firms (OECD 2006; and World Bank Group, 2010).

### Reforms, governance, and supervisory gaps for GFIs
- Reforms since the last FSAP:
  - Many reforms to improve transparency and efficiency of GFIs were put in place and align with previous FSAP recommendations (Appendix C).
  - Momentum has slowed and gaps remain in ensuring a level-playing field.
- Specific reform/timing issues:
  - The scope and timing for the full privatization of Japan Post were fully suspended in 2009.
  - The commencement phase for the full privatization of SCB and DBJ were extended to later years of the decade.
  - Footnote details: For SCB, the commencement of the full privatization term was extended by three and a half years due to global financial crisis and by three more years after the Great East Japan Earthquake. For DBJ, the scheduled full privatization plan (initially within 5–7 years from 2015) was twice extended in 2009, and in 2011. The government also reserve rights to review the process by end-FY2014.
- Fiscal and legal asymmetries among GFIs (Table 2 highlights):
  - Several GFIs (excluding the Japan Post Bank and Insurance) are not subject to corporate tax.
  - Some GFIs’ lending rates apparently vary below market costs.
  - Several GFIs are not subject to capital requirements under respective acts.
  - Inspections are infrequent: about once every two to three years (Table 2).
  - Supervision often joint by multiple ministries; inspection authority mostly delegated to the FSA after 2002 reform.

### Structural weakness of SMEs
- Economic importance of SMEs in Japan:
  - SMEs account for nearly 70 percent of total employment and about 53 percent of manufacturing value-added.
- Leverage and profitability:
  - Debt-equity ratio for SMEs at "250–300 percent; 2.5 times higher than large corporations."
  - Return on assets (ROA) for SMEs around "1 percent", compared with "about 5 percent" in Germany and "3 percent" in France (Tokuda, 2011).
  - Interest coverage ratio for SMEs has been below 1 and downside disparity increased.
- Sectoral and size heterogeneity (Table 3 summary statistics, averages from 2000):
  - Debt equity ratio (overall): "222.1"; Large: "168.2"; Medium: "278.9"; Small: "307.3".
  - Return on assets (overall): "0.8"; Large: "0.9"; Medium: "0.9"; Small: "0.7".
  - Interest rate coverage (in times) (overall): "1.0"; Large: "1.2"; Medium: "1.0"; Small: "1.0".
  - Adjusted net profit margin (overall): "3.3"; Large: "6.2"; Medium: "1.6"; Small: "1.5".
  - Labor productivity (value-added per employee) (overall): "0.3"; Large: "0.8"; Medium: "0.3"; Small: "0.2".
- Regression evidence (Table 5):
  - A one-percentage point increase of debt-equity ratio generally reduces the adjusted net profit margin by about "0.2 percentage points".
  - Manufacturing firms and firms with large capital size have generally better profitability.
  - Robustness check using a VECM: long-run net profit margin is affected by high leverage and weak productivity at the "5 percent" significant level.
- SME balance-sheet and resilience:
  - SMEs have been deleveraging over the past decade, particularly nonmanufacturing firms, but debt-equity remains high.
  - Many SMEs entered the global financial crisis with weaker balance sheets.
  - Firm turnover rate is only about one-third of that in the United Kingdom and the United States.

### Market practices, collateral, and risk-based financing
- Collateral and guarantees:
  - Banks prefer fixed-asset collaterals (e.g., real estate) and personal guarantees in lending.
  - METI survey: over a quarter of responding SMEs consider personal guarantees improve trust and ease credit from banks but pose obstacles to business transfers.
- Asset-based lending (ABL) and alternative financing:
  - SMRJ, CGC, JFC promoted ABL; BoJ established a new credit facility "as much as ¥½ trillion" to support risk-based lending using business-to-business credits as collateral.
  - ABL is not well established; difficulties assessing fair value of assets have limited its use.
- Start-up financing and venture capital:
  - Start-ups rely predominantly on self-finance; venture capital funds are uncommon despite potential funding.
  - Venture capital investment (selected advanced economies, percent of GDP): Japan is shown low relative to Israel, United States, France, Canada (Figure 9).
- Empirical indicators (from figures and tables):
  - Use rate of collateral and personal guarantees (multiple responses) shown for 2005–2008 (Figure 9).
  - Effects of personal guarantee obligations: percentages indicate improving trust and easing financing versus difficulties in business transfers (Figure 9).
  - New methods of financing: many instruments "Already well established", "Available but not well established", "Under consideration", "No plans to introduce", or "Don’t know" (Figure 9).

### Implications for credit intermediation and growth
- Continued survival of nonviable SMEs could:
  - impede credit intermediation and growth potentials;
  - weaken credit risk assessment in banks;
  - reduce credit availability to startups and other viable firms once credit demand picks up.
- Model-based estimates (Fund’s GIMF model):
  - Addressing SME structural weaknesses, along with other structural reforms in the New Growth Strategies, could improve private investment by reducing banks’ monitoring cost and enhancing firm productivity.
  - Based on the Fund’s GIMF model, addressing SME structural weaknesses could raise aggregate productivity by about "¼ percentage points", which in turn would lift long-term growth by "0.1-0.2 percentage points" from the baseline.
  - Assumption: SMEs’ productivity would increase to about "80 percent" of that among large firms; aggregate productivity increase is "¼ percentage points".

*Source: _cr12262 - 19. The presence of GFIs in credit intermediation could add contingent liabilities to*

### 26. In that regard, electronic registration on claims to facilitate financing is at the

### _cr12262 - 26. In that regard, electronic registration on claims to facilitate financing is at the

### Electronic registration of claims (ERMC)
- The Electronically Recorded Monetary Claims (ERMC) helps stipulate rights on claims, saves custody cost for pledged bills/notes, and avoids the risk of double assignment on claims.
- The system could uplift significantly banks’ financing by reforming the lending operations to SMEs and expanding as a settlement facility and securitization of syndicated loans.
- Development is at an early stage and banks need to entail a sizeable investment and operating costs (e.g., converting receivables to electronic claims) (Miyakawa, 2009).
- The FSA and Ministry of Justice enacted an electronic registration in December 2008 (Act on Electronically Recorded Monetary Claims, ERMC) and several recording institutions’ registries were established.

### Credit availability and SME financing
- Loans tend to rely on real estate collateral and personal guarantees; little consideration is given to future cash flows from business.
- Growth companies with large potentials and intellectual property but lacking real estate assets often cannot access adequate financing.
- Securitization of SME loans is not common given low interest rates and difficulties on transferring personal guarantees.
- Japan ranks second to last in venture capital investment as a share of GDP among OECD; start-ups rely predominantly on self-finance (from personal savings and borrowings from families).
- IPOs, mergers and acquisitions provide exit venues that can raise sizeable funds and offer expertise; however, exit venues are inadequate, limiting risk-based capital.
- Efforts to support startups were taken by the SME Agency (http://www.chusho.meti.go.jp/pamflet/leaflet/l-2011/03-venture.pdf ).

### Financial position of regional and shinkin banks
- Asset quality improved over the past decade but deteriorated during the financial crisis: NPL ratio rose to over 3 and 6 percent for regional and shinkin banks, respectively.
- NPLs could be understated under the measure of relaxation of loan classification requirements.
- Preliminary estimates show about 17–32 percent of credit in regional and shinkin banks are with guarantees, relative to 4 percent in city banks (Table 5).
- Weak financial positions may reduce incentives to restructure nonviable SME loans because recognizing restructuring losses could further deteriorate NPLs and profits, potentially tightening financing conditions when temporary measures are phased out.
- Regional and shinkin banks focus on relationship-based banking, providing transactional and advisory relations that can reduce monitoring costs and support clients over the long term; many loan contracts still require traditional collaterals and bank profitability remains sluggish.
- Close ties with local SMEs and local governments can increase credit concentration risks and may lead banks to substitute nonguaranteed loans for guaranteed loans, transferring credit risks.

### Estimated share of credit guarantees for SMEs, by bank types (in trillions of yen)
- Private banks: Outstanding amount 229.19; Share (in perecnt) 90.4; Estimated outstanding guarantees 35.1; Share of credit with guarantees (in percent) 15.3
- City banks: Outstanding amount 78.33; Share (in perecnt) 30.9; Estimated outstanding guarantees 2.9; Share of credit with guarantees (in percent) 3.7
- Regional banks: Outstanding amount 66.12; Share (in perecnt) 26.1; Estimated outstanding guarantees 11.2; Share of credit with guarantees (in percent) 17.0
- Regional banks tier 2: Outstanding amount 23.5; Share (in perecnt) 9.3; Estimated outstanding guarantees 5.0; Share of credit with guarantees (in percent) 21.3
- Trust bank and long-term credit banks: Outstanding amount 10.6; Share (in perecnt) 4.2; Estimated outstanding guarantees 0.4; Share of credit with guarantees (in percent) 3.7
- Credit associations: Outstanding amount 41.3; Share (in perecnt) 16.3; Estimated outstanding guarantees 13.2; Share of credit with guarantees (in percent) 32.0
- Credit cooperatives: Outstanding amount 9.3; Share (in perecnt) 3.7; Estimated outstanding guarantees 2.3; Share of credit with guarantees (in percent) 24.9
- with credit guarantees 1/: 35.1; 13.8
- Other money lenders: Outstanding amount 2.9; Share (in perecnt) 1.1; Estimated outstanding guarantees n.a.; Share of credit with guarantees (in percent) n.a.
- Government financial institutions (GFIs): Outstanding amount 21.4; Share (in perecnt) 8.4; Estimated outstanding guarantees n.a.; Share of credit with guarantees (in percent) n.a.
- Total: Outstanding amount 253.4; Share (in perecnt) 100.0; Estimated outstanding guarantees 35.1

Source: SME Agency, Morgan Stanley Research, and staff estimates.
Note: 1/ From national credit guarantee corporation as of end-FY2010.

### Institutional and regulatory factors affecting investment and startups
- Starting business is more difficult in Japan relative to other G7 countries and selected Asian economies, particularly in terms of duration and costs.
- Firm entry and exit rates are much lower than other advanced countries; business transfer rate has been low and declined recently.
- Credit information availability remains a challenge: several credit registries exist (CRD, RDB, CRITS, SDB) but over half of survey respondents consider information availability limited (e.g., limited information disclosure, and timely information not provided), contributing to a financing gap for the ‘middle-risk’ group and inactive private credit insurance practices.
- There appears no centralized credit bureau on consumer loans, leaving scope for improving efficiency through information sharing.
- A large share of public pension assets are invested in JGBs; reallocating a small fraction towards alternative investments such as venture capital and private equity could improve long-term returns and channel funds to private sector investment.
- The FSA amended related Cabinet Office Ordinance in 2010 to add new stock subscription rights and loans, including subordinated loans, as means of providing funds by specialized investment subsidiaries of banks and insurance companies.

### Improving efficiency of credit channels — findings and policy recommendations
- Financial sector policies should address potential bottlenecks in credit channels; selected support measures need better targeting or timely phase-out as credit demand revives.
- Temporary support measures:
  - The SME Financing Facilitation Act should be set to expire as scheduled by March 2013 to mitigate costs likely to exceed benefits.
- Credit guarantees:
  - Special and counter-cyclical credit guarantees of up to 100 percent of loan value need to be phased out gradually as recovery takes hold, taking into account previous experience in 2000–01 when withdrawing special guarantees led to a marked rise of bankruptcies.
  - Over time, reduce the normal guarantee coverage ratio to about 60 percent—in line with international averages (IMF, 2006)—to ensure market discipline and encourage banks to step up monitoring credit risks.
  - A step-wise approach is advised to limit negative costs such as rapid tightening of financing conditions.
  - Possibilities of rollovering guarantees should be scrutinized and guarantee fees could be set to rise over the usage period to release resources for other firms in need.
- Direct financial support:
  - Redirect GFI funds toward start-ups and high growth areas.
  - Encourage market-based approaches such as public-private partnership (PPP).
  - Empirical studies find startups obtaining financing from GFIs in Japan tend to have better performance throughout their beginning phrase (Fukanuma, and Tadanobu, and Watanabe 2006).
- GFIs reform and governance:
  - Advance momentum for full privatization plans of many GFIs (including Japan Post) to enhance accountability and reduce uncertainty.
  - In the interim, improve transparency and accountable governance for GFIs to limit contingent fiscal risks.
  - Ensure consistent treatments on taxation, accounting, interest setting, and regulatory requirements, considering differences in mandate and funding structure.
  - Strengthen supervision of GFIs through streamlining ministerial responsibilities and more frequent inspections by the FSA.
- SME restructuring:
  - Accelerate restructuring to encourage exits of nonviable firms and new startups.
  - Promote wider use of debt-equity swap and pre-packs to incentivize banks and SMEs to restructure under out-of-court voluntary workouts.
  - Consider establishing an asset management company (AMC) tailored to SMEs to jumpstart the process.
  - For in-court restructuring, consider use of debtor-in-possession to mitigate erosion of firm value during bankruptcy procedures.
- Facilitate financing and risk-based lending:
  - Encourage wider use of electronic registration on claims and risk-based financing.
  - Promote a shift from fixed asset collaterals and personal guarantees towards asset-based lending among financial institutions.
  - Authorities (government and municipalities) and large corporations could lead in utilizing electronic claims to promote origination and trading of electronic claims.
  - Promote securitization of SME loans and venture capital to provide a more diverse set of market-based financing beyond bank loans.
- Strengthening regional and shinkin banks:
  - Upgrade risk management capacity to reflect underlying credit risks; reduce credit and market risk exposures and diversify client bases.
  - Continue advancing benefits of relationship-based banking while monitoring drawbacks of close linkages between banks and SMEs.
  - Consider gradual consolidation of regional and shinkin banks based on private business decisions to improve core profitability and resilience (Hosono, Sakai and Tsuru 2006; Jones and Tsutsumi, 2009).
  - Strengthen supervision to account for impacts when temporary measures are withdrawn.
- Regulatory reforms:
  - Streamline regulations to reduce duration and cost of starting businesses.
  - Encourage long-term institutional investors such as pension funds to provide risk-based capital to facilitate startups and improve investment returns.
  - Consider broadening coverage of credit registries through a more centralized database, and incorporate consumer data bureau covering household or personal credit information.

*Source: IMF staff report excerpt from the provided PDF content.*

### APPENDIX I―REGRESSION ANALYSIS ON HOUSEHOLD

### APPENDIX I―REGRESSION ANALYSIS ON HOUSEHOLD PORTFOLIO ALLOCATION ACROSS AGE AND COHORTS

### Data
- Source: “Household Savings Survey” conducted by Postal Office Research Institute.
- Survey coverage: more than 3,000 households each survey; sample period 1988–2004 on a bi-annual basis.
- Each survey covers about 3,000–5,000 households, with a total of 36,217 observations.
- Survey variables include amounts of each type of financial assets held and household characteristics:
  - (a) age of household heads,
  - (b) annual income,
  - (c) household head’s educational level,
  - (d) household size,
  - (e) geographical locations.
- Observations without household characteristics are excluded, reducing sample size to 24,593.

### Methodology
- Baseline regression (R1) specification: censored-type regression (Tobit model) with dependent variable yijt (i=age, j=cohort, t=time).
- Dependent variables: ratios of deposits, stocks and investment trust, and life insurance to total financial assets.
- Dummy variables:
  - Dage (10-year age groups): under 30, 30s, 40s, 50s, 60s (base), over 70.
  - Dcohort (10-year birth cohorts): 1900-09, 1910-19, 1920-29, 1930-39, 1940-44 (pre-WWII base), 1945-49, 1950-59, 1960-69, 1970-74, 1975-84.
  - Dyear: survey years 1988, 1990, 1992, 1994, 1996, 1998, 2000, 2002; year 2004 is base.
- Control variables set (Ψj,n,t): income level, education level, geographical location, household size.
- Additional regressions:
  - R2: adds household characteristics using dummy variables (household annual income, household size, education (1 if university degree; 0 otherwise), and city size dummies (6 broad categories; 0 if non-city areas)).
  - R3: instead of year dummies, includes market condition variables: real deposit rates, excess return of stocks over deposits (rs - rd), and stock market volatility.

### Key Empirical Findings
- Aggregate portfolio:
  - Households in aggregate hold more than half of financial assets as deposits.
- Age patterns:
  - Deposit proportion varies across age: decreases initially, bottoms around 30s to 40s, then increases with age.
  - Coefficients on age dummies are statistically significant at 5 percent level (age dummies describe differences from the 60s).
  - Across regressions, deposit ratio decreases for age under 30 to 30s but increases from 50s to over 70s.
- Cohort patterns:
  - Cohort differences exist in asset allocation.
  - Households born after 1970 (“post-bubble generations”) tend to allocate more in deposits and less in risky investments (stocks and investment trust) than earlier cohorts.
  - Possible explanations: greater risk aversion from experiencing asset bubbles at younger ages; declining wage growth expectations across cohorts.
- Market conditions:
  - Coefficients on the real deposit rate are positive for deposit ratios and negative for the proportion of equities and investment trusts; both are statistically significant at 5 percent level. This indicates households reallocate financial assets in response to real returns.
  - Volatility of stocks: coefficients reported (see table).
- Household characteristics:
  - Households living in larger cities or with higher education tend to allocate more to risky assets and less to deposits.
  - Interpretation: better access to investment options or better understanding of risk-return tradeoffs.

### Selected Regression Table Highlights (Appendix Table 1)
- Sample Periods reported: 1988-2004; 1988-2004 (excludes 1998).
- Example coefficients (coefficients reported with standard errors in brackets and significance levels as in source):
  - Age dummies (difference from 60s):
    - Dage under 30: 0.067, 0.055, -0.146, -0.097, -0.111, -0.13, -0.039, -0.018, 0.123
    - Dage 30s: -0.052, -0.037, -0.170, 0.01, -0.024, -0.025, 0.019, 0.015, 0.109
    - Dage 40s: -0.075, -0.051, -0.142, -0.005, -0.033, -0.036, 0.060, 0.038, 0.102
    - Dage 50s: -0.063, -0.044, -0.091, 0.006, -0.02, -0.025, 0.048, 0.033, 0.066
    - Dage over 70: 0.071, 0.059, 0.108, -0.012, 0.002, 0.012, -0.059, -0.05, -0.082
  - Cohort dummies (difference from 1940-1944 cohort):
    - Dcohort 1900_09: 0.256, 0.256, 0.142, -0.082, -0.069, -0.039, -0.285, -0.295, -0.21
    - Dcohort 1970_74: 0.08, 0.07, 0.229, -0.212, -0.182, -0.161, -0.068, -0.062, -0.175
    - Dcohort 1975_84: 0.308, 0.293, 0.517, -0.366, -0.336, -0.293, -0.29, -0.277, -0.437
  - Year dummies (differences from year 2004):
    - Dyear 1988: -0.097, -0.085, -0.014, 0.005, 0.116, 0.096
    - Dyear 1996: -0.239, -0.221, -0.058, -0.123, 0.183, 0.184
    - Dyear 1998: -0.275, -0.265, -0.028, -0.069
  - City size dummies (differences from non-city areas):
    - Dcity1 (Tokyo): -0.058, -0.066, 0.169, 0.168, -0.014, -0.008
    - Dcity2 (Government-Decreed Cities): -0.073, -0.073, 0.155, 0.155, 0.001, 0.002
    - Dcity3 (City with population greater or equal to 150,000): -0.048, -0.047, 0.130, 0.131, -0.011, -0.01
    - Dcity4 (City with population greater or equal to 50,000): -0.035, -0.035, 0.10, 0.101, -0.002, -0.002
    - Dcity5 (City with population less than 50,000): -0.027, -0.03, -0.007, -0.008, 0.030, 0.031
  - Higher education dummy (Duniversity degree): -0.043, -0.097, 0.208, 0.165, -0.034, 0.021
  - Income: 0.000, 0.000, 0.000, 0.000, 0.000, 0.000 (standard errors shown; significance reported)
  - Household Size: -0.021, -0.026, -0.003, -0.005, 0.027, 0.032
  - Market conditions:
    - Real Interest Rate of Deposits: 0.023, -0.028, 0.078; -0.036, -0.006, 0.05 (coefficients reported in table)
    - Volatility of Stocks: -0.004, -0.002, 0.006
  - Constant terms: 0.797, 0.917, 0.913, -0.333, -0.48, -0.49, -0.009, -0.086, -0.169
- Observations and likelihood:
  - Observations: 24,593; 24,593; 24,539; 24,593; 24,593; 24,539; 22,375; 22,375; 22,325
  - Uncensored Observations: 18,812; 18,812; 18,772; 4,597; 4,597; 4,597; 13,371; 13,371; 13,344
  - Log likelihood: -15,275.83; -15,106.05; -15,428.20; -9,881.89; -9,348.61; -9,357.48; -14,387.97; -14,287.10; -14,558.26
- Notes from table:
  - Estimated using the maximum likelihood method (censored regression).
  - Figures in parentheses show the standard errors. * p<0.1, ** p<0.05, *** p<0.01.

### Interpretation and Implications
- Age and cohort dynamics matter for household portfolio allocation in Japan: older households and earlier cohorts tend to hold larger shares in deposits; younger “post-bubble” cohorts favor deposits over risky assets.
- Households adjust asset allocation in response to real deposit rates and stock market conditions.
- Socioeconomic characteristics (city size, education) are associated with greater allocation to risky assets.

### Relevant Policy-Related Observations (linked content within appendices)
- Findings suggest that financial market access, financial literacy, and cohort-specific experiences (e.g., asset bubbles) shape household risk-taking and thus have implications for policies aimed at broadening investment channels, improving financial education, and tailoring retirement and savings policy across cohorts and age groups.

*Source: APPENDIX I―REGRESSION ANALYSIS ON HOUSEHOLD PORTFOLIO ALLOCATION ACROSS AGE AND COHORTS.*

### Appendix Table 2. Japan: Definition of SME Stipulated in the SME Basic Act

### Appendix Table 2. Japan: Definition of SME Stipulated in the SME Basic Act

### Definition by industry and size thresholds
- Table headings and labels as presented:
  - "of which: small enterprises"
  - "IndustryCapital"
  - "Regular employees"
  - "Regular employees"
- Industry-specific thresholds:
  - 1 Manufacturing, construction, transport, and other industries — up to ¥300 million — up to 300 — up to 20
  - 2 Wholesale — up to ¥100 million — up to 100 — up to 5
  - 3 Retail — up to ¥50 million — up to 50 — up to 5
  - 4 Services — up to ¥50 million — up to 100 — up to 5
- Source line in table: "Source: SME Agency, METI."

### SME restructuring and Civil Rehabilitation Act (charts and survey results)
- Time-series applications under the Civil Rehabilitation Act (chart x-axis labels preserved):
  - Years shown: 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
  - Vertical axis scale shown: 0 100 200 300 400 500 600 700 800 900 1,000
  - Chart title/caption: "SME Applications under the Civil Rrehabilitation  Act (In number)"
  - Chart source: "Source: Japan Small Business Research Institute"

- Content of Rehabilitation Plans (multiple responses; chart categories preserved):
  - "Personnel reduction"
  - "Review of expenses"
  - "Downsizing unprofitable areas"
  - "Re structu rin g"
  - "Re du ction  of capital"
  - "Personnel reduction" (duplicate label as presented)
  - "Increas of capital"
  - "Transfer of business"
  - "Use of financial support"
  - Chart title/caption: "Content of Rehabilitation Plans (In percent, multiple responses)"
  - Vertical axis tick marks shown: 0 5 10 15 20 25 30

- Areas of Concerns on Rehabilitation Support (categories and percent breakdown as depicted):
  - Categories presented in chart (vertical listing order preserved):
    - "Proprietor's  attitudes  to  improve management"
    - "Feasiliabilty of rehabilitation plan"
    - "Technical feasibility  of current business"
    - "Potential for reducing debts by selling assets"
    - "Impact on  regional economy"
    - "Coordination  with  other  financial institutions"
    - "Bank's lending share, preservation rate, and transaction status"
    - "Other"
  - Chart title/caption: "Areas of Concerns on Rehabilitation Support (in percent of responses)"
  - Vertical axis tick marks shown: 0 5 10 15 20 25 30

- Debt Relief under Rehabilitation Plans (waiver bands and percentages as shown):
  - Bands and labels in chart (preserved order):
    - "1%"
    - "6%"
    - "4%"
    - "12%"
    - "52%"
    - "25%"
  - Corresponding waiver categories (preserved phrasing):
    - "None waived"
    - "Up to 30 % waived"
    - "Over 30 % to up to 50 % waived"
    - "Over 50 % to up to 70 % waived"
    - "Over 70 % to up to 90 % waived"
    - "Over 90 %  waived"
  - Chart title/caption: "Debt Relief under Rehabilitation  Plans (in percent of response)"
  - Chart source: "Source: Japan Small Business Research Institute"

- Obstacles to Continuation of Rehabilitation Support (post-commencement; multiple responses):
  - Categories presented:
    - "Proprietor's lakc of desire to improve management"
    - "Difficulty of monitoring state of management"
    - "Financial Institution's own lack of expertise in providing support"
    - "Difficulty of obtaining cooperation of othe business par tners"
    - "Difficulty of borrowing from financial institutions"
    - "Resistance of interested parties other than financial institutions"
    - "Other"
  - Chart title/caption: "Obstacles to Continuation of Rehabilitation Support (in percent of multiple responses; after commencement)"
  - Horizontal axis tick marks shown: 0 20 40 60 80 100

- Outcomes of Civil Rehabilitation (multiple responses):
  - Categories presented:
    - "Maintenance of employee's employment"
    - "Customer satisfaction"
    - "Maintenance of controlling interest"
    - "Contribution to local community"
    - "Maintenance of superior skills and technology"
    - "Pursuit of company profit"
  - Chart title/caption: "Outcomes of Civil Rehabilitation (In percent of multiple responses)"
  - Chart source: "Source: Japan Small Business Research Institute"

*Source: SME Agency, METI; Japan Small Business Research Institute.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12262.pdf_