The Bank of Japan's working paper published on August 22, 2025, titled "Exploratory Scenario Analysis Considering the Expanded Presence of Domestic and Foreign Investment Funds," provides critically important analysis for financial system stability assessment. This represents a pioneering attempt to quantitatively evaluate systemic risks that traditional bank-centered stress tests cannot fully capture, responding to the growing influence of non-bank sectors, particularly investment funds.
The core of this paper lies in analyzing how additional stress would propagate through the entire financial system via three channels when open-end funds and other investment funds conduct large-scale sales of securities during a Lehman Brothers-level financial crisis. These channels include: first, further decline in asset prices; second, further adverse effects on the real economy; and third, impairment of Japanese financial institutions' investments and loans to overseas funds, thereby visualizing risks previously invisible in conventional stress tests.
According to the analysis results, the amplification effect on capital adequacy ratios at the end of the simulation period (end of fiscal year 2027) shows approximately a 1 percentage point decrease for internationally active banks. This impact is not negligible, with deterioration in domestic and international real economies increasing credit costs across all bank types, while asset price declines and impairment of investments in overseas funds have more severe impacts particularly on internationally active banks.
The most important policy implication is that the magnitude of impact that global investment fund behavior has on Japan's financial system has been quantitatively demonstrated. Cross-border systemic risks that could not be captured in traditional domestic financial institution-centered analysis are now presented as concrete numerical values, providing important insights for advancing financial system supervisory policy.
However, as the paper notes, data and research accumulation regarding non-bank investment behavior and systemic propagation effects remain limited at present, requiring results to be interpreted with appropriate caution. Nevertheless, this analysis represents an important achievement demonstrating that the Bank of Japan is adopting a more comprehensive and realistic approach to financial system stability assessment.