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JCER Financial Stress Index is 0.043, released on August 29, 2022

－ The Fed maintains its stance of controlling inflation at the expense of the economy
－ While the yen weakens again, financial stress remains low level

Takashi MIYAZAKI

  Senior Economist

2022/08/29

  The JCER Financial Stress Index for Japan is an indicator based on daily market data to capture the rise of financial systemic risk, which could cause a malfunction of the entire financial system and adversely affect the real economy. Since this index is based on market data, it is possible to quantitatively grasp financial stress in near real time.
  The index is constructed by selecting three individual indicators from the following five sub-markets: (1) stock market, (2) money market, (3) bond market, (4) financial intermediaries (banking sector), and (5) foreign exchange market. The index takes a value between 0 and 1, and higher value imply higher financial stress.

The latest value: 0.043   <-0.004 from the last weekend>
(As of August 26, 2022)

 

  The index is designed to detect a recurrence of financial system instability in the late 1990s in Japan and of the global financial crisis of 2007-08. With reference to the “Composite Indicator of Systemic Stress” by European Central Bank (ECB), this is created by compositing the following 15 financial market data, such as stock price and its volatility, bond yield spreads, and exchange rate changes.

Stock market: Volatility of TOPIX (absolute value of log return), Ratio of TOPIX to its highest value in the past two years, Liquidity indicator based on trading volume
Money market: Spread between 3-month TIBOR and 3-month Treasury yields, Repo rate, Dollar funding premium (yen basis, 1 year)
Bond market: Volatility of 10-year government bonds (absolute value of change in yield), Swap spread (difference between 2-year swap rate and 2-year government bond yield), BBB rated corporate bond spread
Financial intermediaries (banking sector): Specific shock on bank stocks (estimating the variance of the residuals obtained by regressing the returns of the bank stock index on the returns of TOPIX using the GARCH (1,1) model), Ratio of TOPIX banking stock index to its highest value in the past two years, Banking sector bond spreads
Foreign exchange market: Volatility in yen/dollar exchange rate (absolute value of log return), Volatility in yen/euro exchange rate (absolute value of log return), Volatility in yen/pound exchange rate (absolute value of log return)

For more details of this index, please refer to the following reports and literature.
  Japan Center for Economic Research, 2019. “Risks in the BOJ’s ETF Purchases and Regional Financial Institutions - A stress event could reignite financial system anxiety,” FY 2019 Financial Research Report II: Overhauling Financial Risks in Japan (No. 41), February 12, 2020. (members only).
  Holló, D., Kremer, M. and Lo Duca, M., 2012. “CISS - A Composite Indicator of Systemic Stress in the Financial System,” Working Paper Series, No. 1426, European Central Bank, March 2012.

  The JCER Financial Stress Index have resumed regular updates from April 2022, although the updating of the index was temporarily suspended due to the unavailability of some underlying data following the suspension of LIBOR publication. For details of the revision, please refer to "Notice of the revision in the series of underlying data" below.