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Journal of Population Ageing

, Volume 6, Issue 4, pp 269–303 | Cite as

Demographic Shift and the Financial Sector Stability: The Case of Japan

  • Patrick Imam
Article

Abstract

The financial stability implications of a maturing population have not been much studied in the literature, a gap that this paper seeks to fill with particular reference to Japan. This paper illustrates that life cycle considerations tend to have important effects on the balance sheets of households and other entities, with four possible channels: First, banks business model will be affected, as their role in maturity transformation loses its importance, with regional banks in particular threatened. Expanding overseas or into ancillary services creates new risks. Second, older households will be shown to de-risk their balance sheet by substituting safe for risky assets, which raises the interconnection between households and the sovereign, creating a new source of risk. Third, households tend to shrink their balance sheet above a certain age, creating a negative wealth effect. This clogs the credit channel artery, by reducing the value of collateral and through its deflationary effect, while muting the monetary transmission mechanism further. Finally, older households are exposed to new types of risks, such as longevity risk, which if realized could have implications for sovereign debt and equity re-pricing, as well as impacting financial institutions such as insurance companies.

Keywords

Japan Ageing Financial stability Balance sheets Deflation Demographic shift Risk 

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Copyright information

© Springer Science+Business Media Dordrecht 2013

Authors and Affiliations

  1. 1.International Monetary FundWashingtonUSA

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