Banking on growth: Ensuring the future prosperity of Japan

| Report

Japan today sits at a critical juncture in its economic history. During years of flat to negative GDP growth, a broad political consensus has developed that it is necessary to reignite the country’s economic engine and unlock its latent growth potential. Japan’s banks have an opportunity to participate by boldly enabling national growth. In doing so, they could transform their own fortunes.

The government’s Action Plan of the Growth Strategy, launched in June 2021, outlines national priority actions to boost growth—priorities that will require support from a strong and involved banking sector.1 In addition, recent regulatory changes in form of amendments to the Japan Banking Act have opened doors for banks to move beyond their traditional roles into “beyond banking” activities.

Japanese banks can now pursue a dual mission in support of national prosperity and their own growth. This would continue their long tradition of serving society and could create a positive uplift on national GDP and banking revenues in the years to 2030. Expanded banking involvement across key themes for country growth could result in a 2.0 percent compound annual growth rate (CAGR) in the country’s nominal GDP, versus the 1.7 percent CAGR in GDP growth currently forecast between 2021 and 2030.23 Banks today have an industry revenue of approximately $180 billion. They stand to realize a potential additional $45 billion in industry revenues if they decide to develop their roles in service of national growth, achieving 3.5 percent CAGR in industry revenue from 2021–30 versus the 1.3 percent CAGR currently forecast for the same period. This is far higher than the -3.0 percent CAGR Japan’s banks have faced in industry revenues since 2018.4

To realize this growth potential, Japan’s banks may need to reimagine their traditional roles and strengthen their capabilities in talent development, digitization, and risk management.

The macroeconomic landscape and priority actions for driving sustainable economic growth

Japan has long enjoyed an important position on the world economic stage, thanks in large part to its strong manufacturing and machinery sectors and stable national balance sheet. However, slower GDP growth in recent years has seen it slip behind the world economic powerhouses of the United States and China.5

On the surface, Japan’s economy might seem to be merely stable but stagnant, but its growth potential is immense. Japan continues to be a global innovator, with strong contributions from the automotive, chemicals, computers and electronics, and machinery sectors.6

One of Japan’s strengths is its national balance sheet. The current status of Japan’s national balance sheet is an outcome of household savings. Japan is a country of wealth owners rather than wealth creators, with most of its net worth tied up in personal assets like land, pensions, and currency and deposits rather than in wealth-generating commercial assets like machinery, intellectual property (IP) products, and inventories. The level of household currency and deposits relative to GDP is higher in Japan than in several peer countries (Exhibit 1).

Household deposits relative to GDP are much higher in Japan than in their peer countries.

The Japanese government’s Action Plan of the Growth Strategy, launched in June 2021, sets out multiple national priorities designed to drive growth and build future prosperity and well-being for the Japanese people.7 Drawing on the government plan, Japan’s macroeconomic landscape, and the opportunities and challenges in a changing global economy, McKinsey analysis identifies six themes that stand out as particularly important for driving sustainable economic growth.

These six themes include widespread digitization, investment in innovation and key industries, support for SMEs and start-ups, deployment of solutions for different demographic groups, and boosts to corporate development and labor productivity. In all of this, it will be vital to drive sustainability across industries in support of the country’s net-zero transition.

Transformation across these six areas can lay the foundation for a stronger, more innovative Japanese economy. And in each area, banks have an opportunity to help create the conditions needed to stimulate growth.

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Employing sustainability across industries

In 2019, Japan was the world’s sixth-largest greenhouse-gas emitter, contributing around 3 percent of CO2-equivalent emissions. In a push toward the green transition, Japan has upgraded its National Determined Contributions (NDCs), setting a target to reduce emissions 46 percent below 2013 levels by 2030 and to reach net zero by 2050.8 Banks could accelerate sustainability and help Japan build a competitive edge, not only through financing transition initiatives, but also by launching carbon credit trading markets, such as Climate Impact X in Singapore. Banks might also consider building distribution capabilities for carbon credits, like ClimateSeed, which was launched by BNP Paribas and is now run by AXA Investment Managers. Banks also can propose comprehensive financial solutions—for example, specialized insurance to mitigate the short-term risks of the transition, such as price volatility and instability of supply.

Investing in innovation and key industries

Innovation will work hand in hand with technology to bring future prosperity to the country, and the government is emphasizing investment in priority industries and innovation initiatives. From an investment standpoint, disclosure guidelines could help ease strategic decision-making and encourage greater investment in intellectual property and intangible assets. Banks could support the innovation agenda by building forward-looking perspectives on priority industries, helping key players articulate their investment theses, and facilitating fundraising for those players, including those at the early stages of their innovation journeys.

Aiding SMEs and start-ups

Japan’s government is highlighting the role of SMEs and start-ups in delivering growth and pursuing high-level interventions to drive investment in high-potential businesses. Japanese banks can radically step up their support for SMEs. Banks could develop next-generation credit scoring enabled by analytics in order to provide SMEs with credit based on more accurate risk assessments beyond collateral coverage and financial statements.

Deploying solutions for key demographic groups

In Japan, as elsewhere, consumers are increasingly looking for specialized solutions tailored to their needs. Differentiated financial services and wealth management solutions could include creating easier access to financial services—for example, through digital services and online and mobile banking. Such offerings could serve populations in more remote regions of the country, as well as individuals with mobility challenges. At the same time, encouraging people across different age groups and regions to invest in more diverse financial products could help shift some of their wealth out of low-return assets like retail deposits. Demographic personalization is also key where nonfinancial services are concerned—for example, in health tech and cybersecurity solutions aimed at elderly populations. These solutions have remained largely deprioritized by the banking sector as the industry focused on asset accumulation products that directly impact banking revenues. Banks can potentially resolve these unmet needs by developing a service-based model and launching comprehensive solutions for key segments.

Boosting corporate development and labor productivity

Given the dominant role of large corporations in the Japanese economy, a strong and thriving corporate sector will be critical to boosting growth. Labor productivity also will be key as the country grapples with its aging population. The Action Plan of the Growth Strategy speaks directly to the need to reform Japanese corporate structures to allow for the creation of new, high-value product offerings to widen margins and boost profitability. On the labor side, the government plans to increase productivity, participation rates, and wages to reignite the labor market. Banks have a potential role to play in supporting broader labor deployment goals.

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Implementing digitization

As it has done in the past, technology will underpin much of Japan’s growth revitalization. Prioritizing digitization across the economy can help increase efficiency, grow revenue in existing businesses, and give rise to entirely new business opportunities. To support its digitization goals, the Japanese government has established a Digital Agency to drive digitization across the government and public sector. To accelerate the country’s digitization goals, banks can be role models by implementing their own digital transformations. In addition, they can acquire digital capabilities specific to priority industries and can provide digitization-purposed loans to SMEs to augment the many public-support programs targeting SME digitization.

Banks could take on both traditional and new roles to contribute to the six priority action areas (Exhibit 2). This may require banks to evolve and adapt their services.

Banks can play a key enabling role in each of six priority action areas.

How banks can evolve in the years to 2030

As Japan’s banks lean into a renewed purpose as drivers of future prosperity, they will want to consider how to meet an increasing set of demands from their customer groups. Capturing these opportunities may require banks to enhance their existing practices and approaches across each of their six core roles.

From traditional lender to provider of everyday and complex financing

Today’s lending activity in Japan is fairly traditional in serving corporations, SMEs, and retail customers. Analysis shows that banks are now developing innovative models to lend to SMEs and commoditizing basic lending products. This trend toward greater commoditization is likely to continue, with two types of distinct lending models emerging: everyday banking and complex financing:

  1. In everyday banking and lending, banks may move toward a tech-enabled and low-touch, platform-based lending-as-a-service (LaaS) model to provide simple retail loans, direct SME loans, credit card loans, and basic banking transactions. As these services become increasingly commoditized, the bank in its traditional sense would have fewer direct touchpoints with customers.
  2. For complex financing needs, banks may develop more specialized and structured lending products and services that support clients’ major life events, including mortgages, project financing, and equipment financing.

Both forms of lending could be enhanced through dedicated ecosystem approaches. For example, banks could become e-commerce marketplace specialists to support everyday banking or fill the role of home and equipment finance ecosystem orchestrators for more complex financing.

From wealth protector and generator to enhanced role including financial literacy educator

The traditional role of wealth protector and generator may evolve beyond the brokerage sales transaction approach toward new goals-based wealth management business models tailored to client needs. Banks can leverage their broad base of customer relationships and knowledge to build partnerships or ecosystem approaches to provide the suite of product and service capabilities needed for such holistic advisory programs.

This expanded wealth generator role might also involve creating new value propositions and customer journeys that enable investors to make different investment choices for themselves—helping to break long-held investment behaviors in Japan. Beginning with a discovery session aimed at identifying wealth-generation goals, these journeys could align customer needs with appropriate asset allocations, making it easier for customers to select and pursue different investment choices.

From generalist trade partner to deep sectoral expert

Japan’s banks are already an important partner in trade for local and global corporations. This role is only set to grow in significance as banks step up to support a broader range of priorities, including SMEs and start-ups, innovation, and select industries.

One way that banks may develop their trade partner offering is by focusing on specific industries—developing deep sectoral knowledge to customize their products and services and cater for the end-to-end sectoral value chain. This sector-focused approach would be made possible by banks leveraging their knowledge of end-to-end players in the value chain to understand client needs and serve them better.

From capital markets facilitator to holistic facilitator across asset classes

While there is strong sales and trading business in Japan, serving both domestic and international investors, capital market offerings are at present limited to a select few Japanese banks.

This is almost certainly set to change as Japan switches its investment habits to encourage greater wealth generation. Banks will have an enabling role to play within capital markets to help their clients invest in SMEs, start-ups, and sustainable businesses. Banks may also have a more critical role to play in raising debt capital through green bonds.

From traditional bank to ecosystem orchestrator

The role of banks as ecosystem orchestrators is likely to be one of the most significant and evolving roles for banks globally, not just in Japan. Until now, Japan’s banks have been restricted from playing in these broader spaces, but there is now a regulatory landscape that allows banks to play an extended beyond-banking role. The Japan Financial Services Agency has made a revision to the Banking Act, with effect from November 2021, allowing banks to do ancillary business such as consultation services, data analysis, and daily support services for elderly customers, among others. It also enables ease of approval for advanced banking service including, for example, FinTech services, regional trading services, data analysis, and marketing and advertising.

This is a real opportunity for banks to leverage their existing expertise as lender, wealth protector and generator, trade partner, and capital markets facilitator to launch beyond-banking services.

From finance sector player to policy counselor

As the government looks to create an enabling regulatory environment for growth, banks can leverage their deep sectoral knowledge and expertise to play a bigger role in support of national priorities, especially in terms of implementing government policy. From their experience in promoting digitization, innovation, and sustainability to assisting SMEs, banks have much to offer policy makers and decision makers. To support the priority to meet net-zero targets in a phased manner, for example, banks could provide useful input on how to ensure timely priority-sector lending. And to boost SME growth, banks could advise on start-up-friendly policy and lending. In the United States, for example,

Three koi fish swimming

McKinsey’s Global Banking Annual Review

What a dual mission could mean for growth

Real value is at stake in banks pursuing this dual mission in support of national prosperity and their own growth. From a country GDP perspective, expanded banking involvement across the six priority themes could result in a greater than 15 percent increase in Japan’s nominal GDP growth in the years 2021–30. As mentioned at the beginning of this report, this would mean a 2.0 percent CAGR, versus the 1.7 percent CAGR in GDP growth currently forecast, which translates into an additional GDP of JPY20 trillion. Banks today have an industry revenue of approximately $180 billion. They stand to realize a potential additional $45 billion in industry revenues if they decide to develop their roles in service of national growth, achieving 3.5 percent CAGR in industry revenue from 2021–30 versus the 1.3 percent CAGR currently forecast for the same period. This is far higher than the -3.0 percent CAGR Japan’s banks have faced in industry revenues since 2018.

Building the capabilities required to support growth

As Japan looks toward a new growth-focused era, banks will want to look internally to assess whether they are ready for what lies ahead. Fundamentally, if they are to meet rising expectations and step into their role as engines of prosperity, banks may need to develop their capabilities in three broad areas: talent development, technology deployment, and risk management. While many leading Japanese banks are already developing in these areas, the industry as a whole can benefit from concerted efforts to take advantage of the opportunities in a changing marketplace.

Rethinking traditional approaches to talent management

The range and rate of change required within banks is likely to place new demands on leaders, managers, and employees. Specialist skills to support the evolving roles of banks—including digital talent and new capabilities to create and operate ecosystem offerings or deliver more personalized wealth management services—will be essential.

Traditional elements of organizational culture and process have served Japanese banks well in the past, but banks may need to rethink some of them to keep up with the pace of development. Japanese banks can follow the examples of other leading global banks in developing an agile and continuous-improvement approach to mastering the core capabilities of talent management.

Revamping technology to accelerate digital transformation

Japanese companies are at risk of falling behind their global counterparts in digital transformation. Factors that have contributed to this include a lack of in-house digital talent, CEOs being relatively old, and organizational cultures tending to show preference for in-house seniority over external talent.

Banks in Japan are embarking on digitization to enable digital banking and support transaction migration, remote sales representatives, and data collection and analysis. Digitization will become more important as banks reduce their physical branch networks, build out their online advisory services, and move toward cashless banking. Already, several Japanese banks are leading in this regard.

Taking an integrated risk-adjusted approach

Amid new opportunities and a changing regulatory landscape, Japan’s banks may need to reassess their risk appetite and look internally to ensure they proactively address external risks. Banks with a forward-looking, integrated, risk-adjusted mindset may be best positioned to optimize innovation, profitability, and operational effectiveness as they develop their various roles in service of growth.

Reassessing risk appetite. Japanese banks overall are well capitalized relative to their global peers in developed nations, reflecting their conservative risk profiles and carefully managed risk appetites. Risk-taking creates value when priced and managed appropriately, and Japan’s banks are now favorably positioned and well capitalized to take advantage of increased risk-adjusted returns in the years ahead. Achieving this calls for thoughtful deployment of additional capital, when appropriate, to fund growth and widen risk-adjusted spreads across selected products and transactions.

Improving risk defenses. In parallel, some new or emerging risk categories, catalyzed by external factors, will become more challenging to control relative to traditional risks. Banks may need to step up their defenses across eight areas: cybersecurity, data privacy, third-party oversight, responsible AI, operational resilience, financial crimes, nonfinancial risks, and resolution planning. As these risks continue to evolve, banks will need to balance innovation with staying ahead of threats.

Japanese banking has reached a critical inflection point. To seize this moment and fulfill their dual mission of serving society as engines of growth and pursuing their own success and profitability, banks can transform to meet the changing needs of the country and their banking customers.

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