Financing Growth in Japan Koichi Ishikura Director & Chief Officer for International Affairs & Research Japan Securities Dealers Association May 23, 2016 * This presentation represents the presenter’s own views, and not necessarily those of JSDA

Changes in economic and social environments Demographic change High economic growth like in the past cannot be expected any more due to the increasingly aging population. Changes in financial surplus and deficit by sector - Corporate sector: deficit in 1990 to surplus (US$167 bil.) in 2015 - Government sector: surplus in 1990 to deficit (US$140 bil.) in 2015 - Household sector: continued surplus but flow of surplus is declining.

(trillion yen) CY2015 (FY) Source: Bank of Japan Note: 1. Data up to FY2004 are based on the 1993 SNA. Data from FY2005 onward are based on the 2008 SNA. There is a discontinuity in the data series between FY2004 and FY2005. 2. Figures for CY2015 are on a preliminary report basis.

Changes in financing sources and conduits Assuming that the term “financing growth” covers both: - Financing for infrastructure which underpins economic growth, and - Financing to growth companies Era of postwar reconstruction and high economic growth - Financing for infrastructure (e.g. Shinkansen (bullet train), express highway, power generation projects) : supported by finance from World Bank and government-affiliated financial institutions - Financing to growth companies: support through indirect financing where banks provided corporations with funds using money deposited in savings accounts 　 Non-performing loans after the bubble economy collapse Indirect financing through banks underpinned Japan’s economic growth in the past but over-concentrated risks in the banking sector. Its shortcoming became obvious in the form of nonperforming loans, which triggered the Japanese economy’s post-bubble crisis of the 1990s. ⇒The need to expand and enhance market-based financing was recognized

Three factors for growth Labor Capital Productivity (Total factor productivity) Until 1980s: Rapid economic growth had been underpinned and driven by the increase in capital input and enhanced productivity (technology innovation) In and after 1990s: Population aging ⇒ growth in working population cannot be expected

Source: Research Institute of Economy, Trade and Industry

Strategies for future growth To increase or maintain labor input: - further promotion of activities by women and seniors - acceptance of foreign human resources To increase capital input and productivity: - mobilizing financial assets held by individuals and corporates as risk money to growth areas

“Reform 2020” Projects：strategic growth areas

Provision of risk money to growth areas Portfolio rebalancing: 　　More than 50 % of individuals’ financial assets stays in cash and bank deposits ⇒　Encourage proper risk-taking and investments in growth opportunities NISA (Japanese version of Individual Savings Account) is expected to propel this policy direction Mobilizing internal reserves in corporates for capital investment: More emphasis on ROE, enhanced corporate governance and investor engagement may underpin this trend BOJ’s negative interest policy: Will it work to this end? New tools for providing risk money to VBs and growth opportunities: e.g. Equity-based crowdfunding, shareholders community system for trading unlisted stocks, future schemes utilizing FinTech, etc.