Discussion Papers

Findings from research and studies conducted at the Financial Research Center (FSA Institute) are organized and published as Discussion Papers to stimulate further discussion and comment. Please send comments to: frtc_comments★fsa.go.jp (replace the star sign with @).

The views expressed in the papers are those of the authors and do not necessarily reflect the views of the Financial Services Agency or the FSA Institute.

Discussion Papers (FY 2023)

No.	Title/Author(s)
DP2023-7 (January 2024)	Empirical Analysis of Regional Economies Using Data on 47 Prefectures in Japan and Revitalization of Regional Economies through Digitalization in the Aging Society NAGAI Hideki and YOSHINO Naoyuki Abstract | Full text (PDF:4,264KB)(Full text is available only in Japanese)
DP2023-6 (December 2023)	Optimal Investment Ratio and the Role of Retail Financial Product Distributors SUGIMOTO Takuya and YOSHINO Naoyuki Abstract | Full text (PDF:1,349KB)(Full text is available only in Japanese)
DP2023-5 (September 2023)	Distortions in asset selection, varied ESG scores, and confusion in the ESG debate YOSHINO Naoyuki and YUYAMA Tomonori Abstract | Full text (PDF:1,568KB)
DP2023-4 (August 2023)	Effects of Gender Diversity on Boards of Directors at Regional Banks SUGIURA Yasuyuki and NAKAJIMA Kan Abstract | Full text (PDF:725KB)(Full text is available only in Japanese)
DP2023-3 (August 2023)	Can impact creation and corporate value enhancement both be achieved? —Examination through a case study and an empirical analysis based on content analysis of corporate purpose— HAYASHI Toshikazu and MATSUYAMA Masayuki Abstract | Full text (PDF:1,318KB)(Full text is available only in Japanese)
DP2023-2 (June 2023)	Impact Analysis of Climate-related Risks on Residential Mortgage Portfolios in Japan OKAZAKI Kanji Abstract | Full text (PDF:1,398KB)(Full text is available only in Japanese)
DP2023-1 (June 2023)	The Current Situation and Outlook for Impact-Weighted Accounts: Thinking based on decades of efforts to monetize externalities HAYASHI Toshikazu and MATSUYAMA Masayuki Abstract | Full text (PDF:1,855KB)(Full text is available only in Japanese)

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Abstract

DP2023-7

Empirical Analysis of Regional Economies Using Data on 47 Prefectures in Japan and Revitalization of Regional Economies through Digitalization in the Aging Society

NAGAI Hideki, Research Staff of Financial Research Center (FSA Institute)
YOSHINO Naoyuki, Director of Financial Research Center (FSA Institute), and Professor Emeritus, Keio University

In this paper, we use principal component analysis (PCA) and cluster analysis to categorize the characteristics of 47 prefectures in Japan from a wide range of data on regional economies and on the flow of people, goods, and money in each prefecture, and examine what is needed for balanced growth in regional economies in Japan. We discuss the importance of promoting remote education and remote work.
First, focusing on the flow of people, we observe that a large population movement is prominent when people enter universities and also when they find jobs, but that the population movement at other stages of life is small, except for in some prefectures. There is hardly any movement of people returning to their hometowns after retirement.
Next, looking at the flow of goods from the value of product shipment, there is a significant difference between prefectures with and without a strong industrial sector. The area around Aichi Prefecture, the area around Hiroshima Prefecture, and the Keihin Industrial Zone (the area around Tokyo and Yokohama) have a strong industrial sector and have large outflow of goods and services. The ratio of outflow of goods to gross prefectural product (which includes secondary products and services) is high for Tokyo, Tochigi, and Aichi.
In terms of the flow of money, we can see distinct features, as loans and deposits relative to gross prefectural product differ from prefecture to prefecture. In some prefectures, there are no lending opportunities even when deposits are accumulated. Where lending is small relative to the amount of deposits, such prefectures have little demand for loans within their prefectures.
When we conduct a cluster analysis of prefectures, we can classify prefectures into four clusters, excluding Tokyo. First is prefectures with a strong industrial sector. Second is prefectures that have economic strength and population inflow. Third is prefectures with an aging population and weak fiscal base. And fourth is prefectures in the intermediate group.
To curb population movement when people move to higher education and/or find jobs, it will be effective to promote digital education and increase employment in regional economies through digitalization. Using a theoretical model, we show that the promotion of remote education and remote work will have a positive impact on the economy.
Finally, local financial institutions have central roles to play in regional economies. They can provide loans to support companies’ digitalization, including the development of a remote working environment, and can also provide loans for projects that create jobs in the community, such as the offshore wind power generation project in Akita Prefecture.
 
Keywords: cluster analysis of 47 prefectures; remote education and work; population movement; role of local financial institutions.
 

DP2023-6

Optimal Investment Ratio and the Role of Retail Financial Product Distributors

SUGIMOTO Takuya, former FSA staff (Deputy Director, Risk Analysis Division, Strategy Development and Management Bureau)
YOSHINO Naoyuki, Director, Financial Research Center (FSA Institute) and Professor Emeritus, Keio University

The purpose of this paper is to present the role of retail financial product distributors and the importance of individual customers’ trust in them in determining individuals' optimal level of investment in risk assets.
The following three reasons are often cited for the high savings ratio in Japan in individuals’ asset building: (1) Japanese people’s inherent tendency to be conservative, (2) low expectations for the profitability of stock investment after the collapse of the bubble economy, and (3) in recent years, low financial literacy. All three reasons suggest, with varying degrees, that individuals are not making rational decisions, as opposed to the assumptions of typical finance models. On the other hand, this paper shows that even when individual customers are rational, if they do not trust distributors, the ratio of investment in risk assets to total investment would decrease. Where distributors try to maximize fee income, if those fees are neither clear nor trustworthy to individuals, the ratio of investment to risk assets will fall below the optimal level as a result of rational decisions by individuals under asymmetric information.

Keywords: fee structure; financial literacy; safe asset/risk asset ratio.
 

DP2023-5

Distortions in asset selection, varied ESG scores, and confusion in the ESG debate

YOSHINO Naoyuki, Director, Financial Research Center (FSA Institute) and Professor Emeritus, Keio University
YUYAMA Tomonori, Research Fellow, Financial Research Center (FSA Institute)

ESG investments have become increasingly popular in recent years, and to support such investments, many rating agencies are providing ESG scores of firms. Meanwhile, the debate over ESG is very confusing and swinging, especially in the U.S., and there is a lot of discussion about how it should be done, including political thought. We discuss this issue from an investment-theoretical background. Through consideration of ESG factors, the ESG investment model may have moved from the traditional two-factor model of risk-return to a three-factor model adding an ESG component to it. This paper indicates the potential for distortion of asset allocation through the shift from traditional risk-return considerations to ESG score considerations. This is equally true for green bonds, resulting in the potential for asset allocation to be distorted by green bond criteria. Furthermore, we show that imposing a net carbon tax on greenhouse gas (GHG) emissions is a measure to correct this distortion in asset allocation and make asset allocation more risk-return based, in addressing global environmental issues.

Keywords: ESG (Environmental, Society and Governance); SDGs, Green investment; ESG score, Green credit rating; Net carbon tax.
 

DP2023-4

Effects of Gender Diversity on Boards of Directors at Regional Banks

SUGIURA Yasuyuki, Special Research Fellow, Financial Research Center (FSA Institute)
NAKAJIMA Kan, Special Research Fellow, Financial Research Center (FSA Institute)

This paper aims to analyze the effects of board gender diversity on bank management at Japanese regional banks. The board is generally expected to provide two functions: monitoring and advising. While the reform of the board of directors in Japan is mainly aimed at encouraging corporate risk-taking, it is also essential to restrain excessive risk-taking in bank management. From these viewpoints, we conduct an empirical study to confirm the effects of gender diversity on banks’ performance and risks using the samples of Japanese regional banks from 2010 to 2020.
We find no positive impact of board gender diversity on regional banks’ performance or risk-taking through the regression analysis. Our results do not change when the following conditions are considered: the complexity of the banking businesses, the likelihood that the effects of gender diversity work through outside directors, and the period when the appointment of female outside directors increased. One possible explanation for the results is that the composition of outside directors at Japanese regional banks is male-dominated. In addition, there may not be a sufficient pool of female candidates for outside director positions, considering that the appointment of female outside directors tends to be observed mainly in prefectures with large economies. Our findings indicate that the lack of gender diversity in boards of directors is one of the reasons for the results that differ from those of previous studies. Examining the remaining issues would be an important research question for future research.
 
Keywords: Corporate governance, female outside directors, regional banks, board gender diversity.

DP2023-3

Can impact creation and corporate value enhancement both be achieved? 
—Examination through a case study and an empirical analysis based on content analysis of corporate purpose—

HAYASHI Toshikazu, Special Research Fellow, Financial Research Center (FSA Institute)
MATSUYAMA Masayuki, Special Research Fellow, Financial Research Center (FSA Institute)

This paper attempts to discover the relationship between impact creation and the enhancement of corporate value, bearing in mind that there are people in business management and investment who are skeptical about whether it is possible to achieve both impact creation and the enhancement of corporate value, or rather, have the feeling that there is a possible tradeoff between impact creation and the enhancement of corporate value. In this paper, by analyzing sources of impact creation, we cite a new way of thinking by which we distinguish “expansion of the pie” and “modification of the way to split the pie.” Based on this thinking, it is implied that no tradeoff exists essentially when impact creation is sought through “expansion of the pie,” that is, by expanding the scale of businesses that contribute to solving environmental and social problems. On the other hand, it is implied that tradeoffs essentially exists when companies aim to create impacts by “modifying the way to split the pie,” that is, increasing the share of societal benefits at the expense of reducing the share of firms’ profits. However, a case study of companies reveals that there actually are companies, even in the latter situation, that create impacts and at the same time increase their corporate value through their efforts to overcome the tradeoffs and/or by taking advantage of changes in the regulatory environment that lead to the elimination of tradeoffs. Furthermore, empirical analysis focusing on the corporate purposes of Japanese companies reveals that impact-oriented companies tend to outperform, in terms of financial performance as well. These analyses and examination suggest that achieving both impact creation and the enhancement of corporate value is not always possible, but it is sufficiently reasonably possible depending on the situation.
 
Keywords: impact orientation; corporate purpose; impact and financial performance.

DP2023-2

Impact Analysis of Climate-related Risks on Residential Mortgage Portfolios in Japan

OKAZAKI Kanji, Associate Research Fellow, Financial Research Center (FSA Institute)

In recent years, climate-related risks in the financial sector have been increasing as a result of frequent and severe natural disasters. Yet, the impact analysis of retail portfolios is often limited to simple analysis. Nevertheless, the impact of climate-related risks on residential mortgage portfolios is not small, considering Japan’s geographical features and the share of residential mortgage loans in financial institutions’ total loans outstanding.
Previous research has shown that energy-efficient housing reduces default risk. Although the practices of Japanese financial institutions do not explicitly incorporate climate-related risks in mortgage screening and monitoring, it was suggested that climate-related risks are reflected through changes in housing prices. In addition, regarding the method of quantitative impact analysis, we attempt to reflect climate-related risks using existing models for estimating the probability of default (PD). We also discuss the role of fire insurance in reducing risks related to residential mortgage portfolios and their sustainability amid the increasing frequency and severity of natural disasters. Finally, we clarify challenges in addressing climate-related risks associated with residential mortgage portfolios.

Keywords:Residential mortgage loan, Climate-related risk.

DP2023-1

The Current Situation and Outlook for Impact-Weighted Accounts: Thinking based on decades of efforts to monetize externalities

HAYASHI Toshikazu, Special Research Fellow, Financial Research Center (FSA Institute)
MATSUYAMA Masayuki, Special Research Fellow, Financial Research Center (FSA Institute)

This report focuses on “impact-weighted accounts,” which have been researched and developed primarily by Harvard Business School and the Impact Economy Foundation of the Netherlands. It clarifies related terminology, discusses the aim of impact-weighted accounts and economic implications, examines the progress made in research and development of the methodology, and summarizes disclosure cases of firms at home and abroad. The report also gives an outlook on impact-weighted accounts based on findings and their implications from research to date by academics and practitioners, as there is already half a century of history to measure impacts generated by firms in monetary terms and utilize such valuation, which is the most notable feature of impacted-weight accounts.
In recent years, climate-related risks in the financial sector have been increasing as a result of frequent and severe natural disasters. Yet, the impact analysis of retail portfolios is often limited to simple analysis. Nevertheless, the impact of climate-related risks on residential mortgage portfolios is not small, considering Japan’s geographical features and the share of residential mortgage loans in financial institutions’ total loans outstanding.
Previous research has shown that energy-efficient housing reduces default risk. Although the practices of Japanese financial institutions do not explicitly incorporate climate-related risks in mortgage screening and monitoring, it was suggested that climate-related risks are reflected through changes in housing prices. In addition, regarding the method of quantitative impact analysis, we attempt to reflect climate-related risks using existing models for estimating the probability of default (PD). We also discuss the role of fire insurance in reducing risks related to residential mortgage portfolios and their sustainability amid the increasing frequency and severity of natural disasters. Finally, we clarify challenges in addressing climate-related risks associated with residential mortgage portfolios.

Keywords: Impact-weighted accounts; monetization of externalities; and full-cost accounting.