JCER Financial Stress Index is 0.178, released on April 27, 2020
－ Concerns over worsening economic activity are deeply rooted, stress rises slightly
The JCER Financial Stress Index for Japan is, based on daily market data, an indicator to capture the rise of financial systemic risk. Systemic risk is defined that financial system as a whole is malfunctioning and the real economy is adversely affected. 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 intermediation (banking sector), and (5) foreign exchange market.
The latest value: 0.178 (As of April 24, 2020)
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. This index refers to the “Composite Indicator of Systemic Stress” by European Central Bank (ECB) and 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 intermediation (banking sector): Specific shock to 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 of yen/dollar exchange rate (absolute value of log return), Volatility of yen/euro exchange rate (absolute value of log return), Volatility of 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.
－ Financial stress remains low level due to economic improvement in the US, expectations for accelerated vaccination also support reassurance
－ Although financial stress remains low level, declaration of a state of emergency is announced in four prefectures
－ The central banks in Japan, the US and Euro decided to continue monetary easing, and financial stress remains low level
－ Stock prices are at high levels for the first time in 30 and a half years due to improvement in corporate performance, financial stress remains low level
－ Financial stress of the new year begins at a low level due to expectations for US economic measures and prevailing of vaccines