IMF Staff Country Reports

This Technical Note discusses Systemic Risk Analysis and Stress Testing for the Japan Financial Sector Assessment Program (FSAP). The Japanese financial system stands at a critical juncture amid an evolving macroeconomic environment, facing, in particular, market risk and foreign currency (FX) liquidity risk. The FSAP assessed the financial sector’s resilience with a comprehensive scenario-based systemic risk analysis. The systemic risk analysis comprised a comprehensive set of stress testing exercises covering the financial and nonfinancial sectors. The FSAP’s scenario-based risk analysis suggests that the financial system is broadly resilient to a range of macrofinancial shocks, though there are some areas of susceptibility. The challenging risk environment underscores the need to strengthen the Japanese authorities’ systemic risk monitoring and analysis. The authorities should also continue to collect information on banks’ securities holdings including interest rate hedging and FX positions, and to carefully monitor risks from sizable exposures of financial institutions to domestic and foreign securities and banks’ FX liquidity needs.