The Role of the Shadow Banking Sector in the Financial System of Japan

In the financial system, along with the traditional banking sector, there is a shadow banking sector that has a number of specific characteristics. Unlike commercial banks and other depository institutions, shadow financial institutions are characterized by complex processes, relatively weak regulation, and greater exposure to risks. In spite of the tightening of regulation after the global financial crisis, the size of the shadow banking system is showing positive dynamics on a worldwide level. Currently, the non-banking financial sector is treated as a source of a number of risks to the financial system, but its role cannot be viewed in an exclusively negative light due to the existence of synergies with the traditional banking system and the heterogeneity of its elements, some of which have different competitive advantages. The purpose of this paper is to conduct a qualitative and quantitative analysis of the role of the shadow banking sector (which has a number of specific features) in the financial system of Japan. In this paper, the size of the shadow banking system in Japan has been estimated using several methods. In addition, its main qualitative characteristics have been identified: investment trusts make up the biggest share in the sector’s total assets (the same situation is observed on a worldwide level); however, compared to the global structure, a higher proportion is represented by financial companies, and broker-dealers; overall dynamics of the system size are broadly in line with global trends. Also, to achieve the research goal, a regression analysis using the standard vector autoregression model has been performed. Based on the results of standard vector autoregression, Granger causality testing and analysis of impulse response functions, the following conclusions have been made: shadow banking in Japan has a relatively weak but statistically significant complementary relationship with traditional banking; the shadow banking sector increases the instability of the financial system through several channels but does not have a statistically significant direct impact on the macroeconomics.