Physical risks from climate change faced by Japan's financial institutions: Impact of floods on real economy, land prices, and FIs' financial conditions

This article overviews implications of physical risks from climate change to Japan's financial institutions (FIs), focusing on the impacts of floods on the real economy, land prices and FIs' financial conditions. Floods cause massive direct damage to human lives and material resources. The empirical analyses using Japan's data suggest that the indirect effect of such damage on the real economy, land prices, and FIs' financial conditions has not been sizable over the analysis period, as the effect diminishes over time with the progress of reconstruction. The long-term simulation using a medium-scale macroeconomic model that takes into consideration possible climate changes and increases in flood damage in the future, however, suggests that the indirect effect can have a non-negligible impact on real GDP and FIs' net worth going forward. The outlook for the physical risks is extremely uncertain, varying depending on multiple factors including the pace of transition to a de-carbonized economy and interactions between the global average temperature and the frequency and scale of disasters, as well as productivity of the economy.