Kuroda warns of weak profitability at regional banks

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Japan’s financial regulator is planning to question regional banks that are deemed to have poor business models, according to Reuters.

In a rare acknowledgement of the rising cost of the central bank’s prolonged monetary easing, Bank of Japan Governor (BOJ) Haruhiko Kuroda warned on Friday that the profitability of regional banks was declining.

According to Reuter’s report, the Financial Services Agency (FSA) is concerned some regional banks are neglecting their core lending operations to local businesses.

Without knowing how many banks are involved in this business, Reuters said the agency will inspect regional banks and ask them to change their business models if necessary.

VCG Photo

Although Kuroda has confidence in Japan’s economy, saying that it was expanding moderately due to a well-balanced increase in both external and domestic demand, Japan’s falling borrowing costs, which benefit companies but squeeze banks’ margins, are eroding the profitability of financial institutions in regional areas.

Therefore, the agency has been urging regional banks to come up with more sustainable ways to make money as they face diminishing returns on their traditional lending business due to Japan's aging population and low interest rate issues.

"If price hikes broaden, medium- and long-term inflation expectations will steadily heighten," Kuroda said. "The BOJ expects inflation to accelerate toward its two percent inflation target."

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan, September 21, 2017. /Reuters Photo

Under a policy put in place last year, the BOJ guides short-term interest rates at minus 0.1 percent and the 10-year bond yield of around zero percent, maintained with heavy money printing, is being used to achieve its 2 percent inflation target.

Even though Kuroda reiterated the BOJ’s pledge to maintain its "powerful" monetary easing to achieve its price goal at the earliest date possible, Japan's financial regulator is still concerned some regional banks are neglecting their core lending operations and plans to question regional banks that are deemed to have poor business models, according to Reuters.

According to a draft report by the FSA, profits from lending and fees at Japan’s smaller banks are falling faster than expected, with more than half of the institutions losing money on these core operations.

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