Japanese Financial Institutions Expanding Abroad: Opportunities and Risks

Abstract

Overseas activities of Japanese financial institutions have risen, mainly in Asia, since the global financial crisis. Stagnant growth and low interest margins in Japan have added to incentives to seek opportunities abroad. This paper explores the determinants of Japanese banks’ overseas expansion, and assesses whether these cross-border activities will continue under the new macroeconomic policies often referred as “Abenomics.” The analysis finds that Japanese banks are well positioned to scale up foreign exposures, thanks to their relative resilient balance sheets and the robust growth in the region. Stronger domestic growth in Japan could mitigate the pace, but is unlikely to reverse a long-standing trend because empirical estimates suggest that global and regional factors play a more prominent role in the growth of cross-border claims. The increasing cross-border activity would pose funding risks and supervisory challenges that require continued close monitoring. An incomplete set of domestic policies that fails to raise growth and exit deflation could, however, undermine prospects of Japanese banks in expanding abroad.