Governing Finance for Sustainable Prosperity in Japan
This policy brief builds on the discussions held during a roundtable on “Governing Finance for Sustainable Prosperity in Japan” convened by the ASEAN+3 Macroeconomic Research Office (AMRO), the Council on Economic Policies (CEP) and the South East Asian Central Banks (SEACEN) Research and Training Centre in March 2026.
Japan occupies a singular position in global finance: it is one of the world’s most advanced economies and the one that has most extensively challenged the limits of conventional monetary and fiscal policy. Decades of experience in deploying novel monetary policy tools and acceptance of large public sector deficits have produced a macro financial policy landscape with few analogs. Japan’s financial governance institutions now face a uniquely demanding task – completing one of the most consequential monetary policy transitions in modern history and maintaining fiscal sustainability while simultaneously harnessing the financial system as a catalyst for the country’s economic priorities.
Governing Finance in Times of Structural Transformation
Rising demographic pressures, the demands of the digital and green transitions, and geopolitical reconfiguration are reshaping the environment in which the Bank of Japan (BOJ), the Financial Services Agency (FSA) and the Ministry of Finance (MOF) operate. Neither institution can address these challenges in isolation. Structural transitions cut across traditional policy domains, requiring close cooperation between the central bank, the financial regulator, and the fiscal authorities. A renewal of the 2013 Joint Statement of the Government and the BOJ can be an important step in this direction.
Monetary Policy for Sustainable Prosperity
The pace, sequencing, and communication of normalization will be among the BOJ’s most consequential policy decisions of the decade. Various structural dynamics – the legacy of unconventional policy, a large public debt burden, demographic effects on inflation, and a growing frequency and intensity of supply shocks – complicate this transition. A wider use of targeted monetary policy interventions may be key to navigating this complexity.
Stability and Risk-Taking: The Supervisory Balance
Japan’s financial system enters the normalization period carrying embedded vulnerabilities: large bond portfolios subject to mark-to-market losses, asset-liability mismatches among life insurers, and regional banks under demographic pressure. Forward-looking, scenario-based supervision will be a critical supervisory priority. Calibrating supervisory requirements to support the productive risk-taking that Japan’s economic transformation requires will also be essential.
Governing the Digitalization of Money and Finance
The digitalization of money and finance adds a further layer of complexity and opportunity. Japan is a key node in regional financial flows, making the country a key potential accelerant for regional payment system modernization. Priorities include deeper local currency settlement arrangements, faster retail payment interlinking, and coordinated regulatory frameworks for cross-border digital finance. The country also faces consequential decisions about its governance of stablecoins and the possible introduction of a central bank digital currency. These decisions include weighing the risks that foreign-currency, mainly USD stablecoins could pose to monetary sovereignty, and the scope for yen-denominated and multi-currency alternatives that avoid deepening the region’s USD dependence.
Japan faces a demanding domestic economic agenda. Its institutional robustness, policy experience, and regional standing mean that how it meets this agenda will resonate well beyond its borders, shaping financial governance for sustainable prosperity across the ASEAN+3 region and beyond.
