Weak growth and low interest rates, together with underlying demographic headwinds, are
posing chronic challenges for the financial system. Despite accommodative financial conditions,
sluggish domestic demand have dampened investment and domestic credit growth. Combined with
low interest rates and a flat yield curve, these factors are posing a sustained challenge for the
financial system—one of the largest and most sophisticated in the world. To a significant extent,
factors behind this environment are structural in nature, reflecting in particular demographic
headwinds. Profitability of banks and life insurers is low, and net interest margins are shrinking.
Since many advanced economies are likely to face similar headwinds in the future, the importance of
Japan’s response to these challenges extends beyond its borders.
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