January 2015
Japan Financial Report
Report 1

Regional Finance in an Age of Population Decline:– Falling Capital Demand Requiring Banks to Find New Business Models –Kazumasa Iwata
President, Japan Center for Economic Research

Ikuko Fueda-Samikawa
Principal Economist, Japan Center for Economic Research
Financial Research Team:
Madoka Kitamatsu, Nikkei Inc.
Satoshi Nishimura, Japan Finance Corporation
Naoki Hariu, Japan Housing Finance Agency
Tatsuhito Sekiguchi, Japan Finance Corporation

1. Population decline and aging in Japan
Regional banks in Japan are facing the inevitable consequence of changing demography; i.e.
aging and declining of population whereby shrinking credit demand. According to estimates by theStatistics Bureau of the Ministry of Internal Affairs and Communications, Japan’s population trend
has already entered the era of gradual decline. In particular, working-age population, the 15 to 64
age group with significant influence on regional economy, has continuously dropped in all 47
prefectures since 2012.
The future looks even grimmer according to projections by the National Institute ofPopulation and Social Security Research. The Institute predicts that in 2025, the working-age
population will decline by 10 to 20% compared to 2010 in most prefectures. Old age population over
65, on the contrary, will continue to increase.
2. The Conditions Surrounding Regional Financial Institutions
2.1. Government, Political Calls for “Reorganization of Regional Finance”
Within the Japanese government and the ruling political parties, interest in the question of thenation’s regional financial institutions is on the rise. The Liberal Democratic Party’s Headquarters
for Japan’s Economic Revitalization, in its Japan Revival Vision announced in May 2014, remarked
on the low profitability of regional financial institutions and the wide variance seen in their capital
adequacy, leading to lingering doubts as to whether they would be able to meet the various needs oftheir regions in years to come.
The revised Japan Revitalization Strategy issued in June 2014 also touches on the issue ofregional banks. In taking on more risk, it notes, these institutions will have to enhance their

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the strategy states, as regional financial institutions appropriately assess their own businessperformance, they will need to coordinate with other institutions on the operations side and evenview a reorganization of the regional financial sector as one promising option going forward. The
Council on Economic and Fiscal Policy, chaired by Prime Minister Shinzo Abe, has also focused on
ways to revitalize regional economies in its deliberations, proposing that regional banks and otherfinancial institutions pursue business efficiency, including through bold reorganization in the sector,
and provide capital to the regions they serve via investment funds and other more diverse modes offunding.

2.2. FSA and BOJ Trends: Concern over Regional Banks’ Profitability
The Financial Services Agency published its first Financial Monitoring Report in July 2014.
On the subject of the medium to long-term sustainability of regional financial institutions’ businessmodels, the report sees it as problematic that despite the predicted fall in outstanding loans given thenationwide decline in population, regional banks are aspiring to increase lending volume in theirmedium-term management plans: “Across the sector as a whole, there is a possibility that businessmodels depending on lending growth will fall apart over the medium to longer term.” And in its
April 2014 Financial System Report, the Bank of Japan indicated its concern that by increasing theirloans outside their home regions, the country’s regional financial institutions may be dragging down
their profitability.
2.3. Private-Public Funds on the Rise; Investment in Healthcare, Other Areas
As a means of ensuring their survival, regional banks are increasingly creating investment
funds in partnership with public-sector actors to provide businesses with funding and managerial
support. This is because by taking on public money, the institutions can reduce their own risk
exposure. Many of these funds aim to provide risk capital to areas like so-called senary industries(“sixth-level” enterprises integrating secondary and tertiary industry functions with the primaryindustries of agriculture or fisheries) and healthcare.
January 2013 saw the launch of A-FIVE, the Agriculture, forestry and fisheries Fundcorporation for Innovation, Value-chain, and Expansion Japan. For regional financial institutions,agriculture had not traditionally been an area for vigorous unilateral investment due to the small
scale of businesses and the high risk associated with factors like unfavorable weather. A-FIVE,
however, can provide direct funding to joint ventures backed by agricultural, forestry, or fisheries
concerns and companies from other industries. There are also cases where investment is directed to“subfunds” that are managed by city or regional banks and provide capital to primary industry.
In March 2013, the Enterprise Turnaround Initiative Corporation of Japan (ETIC) was
reorganized to form the Regional Economy Vitalization Corporation of Japan (REVIC) to take on
new tasks including the facilitation of investment by general (unlimited liability) partnerships infunds aiming to revitalize businesses or regional economies. In September 2014, REVIC launched
Japan’s first fund specializing in support for the regional healthcare industry. With participation bymajor city bank Mizuho and leading regional banks, this fund directs investment to medical andnursing care providers around the country.

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2.4. Moves to Reorganize Along System-Based Lines
Cost cutting is one aim of the tie-ups and consolidations of regional financial institutions.
Merely integrating two separate accounting systems can chop 20–30% off of the running cost, which
can range from several hundred million yen up to the ¥3 billion level. Today many regional banks
share common accounting systems with other banks (see Table 1 and Figure 1).
Table 1. Accounting systems shared by financial institutions
SystemHITACHI（17)

Bank

Open System

Shizuoka, Keiyo

Banks'ware

Michinoku, San‐In Godo, Higo

NEXTBASE

Tokushima, Kagawa, Kita‐Nippon, Tomato, Kochi, Tochigi, Chukyo,
Taiko, Daisan, Shizuoka Chuo, Taisho, Daito

Regional banks joint Kyoto, Chiba Kogyo, Iwate, Senshu Ikeda, Fukui, Aomori, Hokuetsu,
centerAkita, Shikoku, Nishi-Nippon City, Ashikaga, Oita, Tottori, Aichi
NTT DATA(34)

FUJITSU(3)

IBM japan(22)

BeSTA cloud

Shonai, Hokuto

STELLA CUBE

Tokyo Tomin, Tajima, Toyama, Nagano, Kanagawa, Tohoku, Sendai,
Kirayaka

MEJAR

Yokohama, Hokuriku, Hokkaido, 77

SYSTEM BANKINGKYUSHU KYOUDOUCENTER

Fikuoka chuo, Saga Kyoei, Nagasaki, Howa, Miyazaki Taiyo, Minami
NipponPROBANK

Toho, Shimizu, Saikyo

TSUBASA

Chiba, Chugoku, Daishi, Iyo

Fight21

Fukuoka, Hiroshima, Shinwa, Kumamoto

ChanceJoyo, Hyakujushi, Juroku, Nanto, Yamaguchi, Kitakyushu, Momiji

JUUDANKAI
Nihon Unisys
BankVision
(10)
NEC
(4)

BankingWeb21

Yamagata, Tsukuba, Musashino, Hachijuni, Awa, Miyazaki, Ryukyus
Hyakugo, Eighteenth, Chikuho, Kiyo, Saga, Yamanashi Chuo,
Kagoshima, Suruga, Hokkoku, Ogaki Kyoritsu
Yachiyo, Mie, Tokyo Star, Okinawa

Note: Including financial institutions that have expressed plans to participate in shared systems.
Source: Created based on financial institutions websites and various reports such as Nikkei Sangyo Shimbun

Figure 1. Market shares of IT firms for bank accounting systems（Including systems for single
banks）

Source: Created based on financial institutions websites and various reports such as Nikkei Sangyo Shimbun

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Major IT firms are engaged in fierce competition to land accounting system orders from firstand second-tier regional banks. The outcome of this competition, along with other factors in the
reorganization and integration of these systems, could impact the tie-ups among regional banks
going forward. Already, financial institutions that are using the same system are showing moves
toward deepening their ties on the banking operations side as well. In April 2014, the Chiba Bankand other institutions that have built up a cooperative framework through the “TSUBASA Project”,
an effort to boost use of common systems, decided to go beyond the system level and provide one
another with needed personnel and other resources in times of emergency, such as after a majordisaster. The scope of this cooperation is extending also to areas like personnel exchanges and joint
sponsorship of regional tourism and product fairs. The banks are constructing a framework in which
they can cooperate according to their own fields of excellence. The regional banks involved in the“TSUBASA Project” signed an agreement in September 2014 to strengthen ties in areas includinginternational operations. This represented a measure to remedy a weakness these banks havevis-à-vis megabank competitors, namely their lack of bases of operations overseas, by sharing
personnel and branches with one another. Other regional banks are expected to follow suit bycontinuing to reduce system costs, of course, but also by accelerating coordination efforts in a wide
range of fields centered on those systems.
3. The Competitive Environment Surrounding Regional Banks
3.1. Lower Margins Even on Lending Growth; Extra-regional Loans Impact Profitability
The total net income for Japan’s regional banks in FY 2013 (April 2013–March 2014) reached
its highest level in eight years. A total of 20 regional banks reported their highest profit ever on a net
income basis for FY 2013. As of the end of the fiscal year, total outstanding loans for all regionalbanks were up 3.0% from the previous year. However, despite this rise in outstanding loans, profit
margins were down. Interest rates have continued to fall in the wake of the Bank of Japan’squantitative and qualitative monetary easing, and this, along with the heightened competition among
lenders, has kept the lending-deposit profit margin on a steady decline. In addition to the sparsedemand for capital among enterprises brought along by long years of deflationary conditions, banks
have directed lending to the few places where there is still demand at ever-lower interest rates,
leading to the present situation.
A clear evidence of the harshness of the lending competition among regional financial
institutions is the growth in their lending outside their home regions—loans to borrowers locatedother than the prefectures where they are headquartered. Nationwide, the total of such loans hasgrown to reach 30% of all outstanding lending. In regions where this figure is particularly high, morethan 50% of loans have been extended outside the home region, and there are some prefectures, suchas Shimane, where the figure has topped over 60%. And a trend is clearly discernible connecting
banks with high out-of-home-region lending ratios to lower investment yields on their loans (seeFigure 2).

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Figure 2. Out-of-home-region shares and yields on lending
4.0（yield on lending,%）

4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

（yield on lending,%）

1.0

0.5

March1999

y = -0.0039x + 2.824
R² = 0.045

0.0
0

15

30
45
60
75
（out-of-home-region share,%）0.5

y = -0.007x + 1.8453
R² = 0.1252

March2014

0.0
0

15

30
45
60
75
（out-of-home-region share,%）Source: The Financial Journal Co.,Ltd. “Financial Map”, NEEDS-Financial QUEST

3.2. Population Declines and Profit Structures
A report titled “Analysis of Financial Institutions’ Future Profit Structures” recently gained
considerable attention among those interested in regional bank management. In December 2013, theso-called Mori Paper was delivered to presidents of regional banks. The Mori Paper was written by
Nobuchika Mori, former director-general of the FSA Inspection Bureau, analyzing Japan’s
population trends and regional bank profitability. As the report has not been disclosed to the public,
we attempted to reproduce some of the content of the Paper in Figure 3 taking hints from media
reports. The vertical axis shows the rate of change in working-age population from 2010 to 2025 in
the prefectures where each regional bank has its headquarters; the horizontal plot shows the FY 2013
profitability of the banks, as measured by their loan yield minus interest paid on deposits, credit cost
ratio, and expense ratio. In regions where the change in working-age population is gradual, theprofitability is higher, while in regions whose populations are plummeting rapidly, profit figures arecorrespondingly lower.

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Figure 3. Analysis of Financial Institutions’ Future Profit Structures
rate of return(%)
0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

0

-5

percentage working-age population change(%)

-10

-15

-20

-25
y = 2.7266x - 18.272
R² = 0.0171-30

Note1: The vertical axis shows the rate of change in productive population from 2010 to 2025 in the prefectures
where each regional bank has its headquarters; the horizontal plot shows the FY 2013 profitability of thebanks, as measured by their loan yield minus interest paid on deposits, credit cost ratio, and expense ratio.
Note2: Given space limitations, the highest rate of return was 2.6% but includes it for 1.6%.
Source: National Institute of Population and Social Security Research “Population Projection by Prefecture”, Annual
report of regional banks , NEEDS-Financial QUEST

3.3. Regional Banks Accelerate Their Regional Tie-ups
As regional populations fall and local companies pursue opportunities overseas instead of in
the home market, demand for funding is waning. Regional banks are responding by seeking freshbusiness chances through tie-ups. The “nine-bank consortium,” which brought together the Bank ofFukuoka and eight other institutions to coordinate financing and other operations, was the wide-areatie-up that attracted the most attention in 2014. This consortium aims to diversify revenue sources
and secure new profit streams, such as by engaging in financing to revitalize businesses on a
per-bank basis while sharing risk going beyond what a single bank can take on across multiple
institutions. The participants are also expected to cooperate in efforts to introduce business partners.
Management integration is also underway among Japan’s regional banks. In October, Tokyo
Tomin Bank and Yachiyo Bank formed a joint holding company. In November, the Bank of
Yokohama, Japan’s largest regional bank headquartered in Kanagawa Prefecture, was reported tointegrate its business with Higashi-Nippon Bank headquartered in Tokyo. For the Bank of
Yokohama, this deal offered a way to expand its geographical coverage and the chance to capture
more of the demand expected to accompany preparations for the Tokyo Olympics, to be held in 2020.
A few days after the newspaper reporting, Higo Bank and Kagoshima Bank announced their merger.
Both of these banks are the front-runners in their respective prefectures, Kumamoto and Kagoshima,making the deal appears more like a future-oriented move to expand business and less like themergers meant to prop up ailing banks that were frequently seen in the past.

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4. Lending Expected to Decrease for 70% of Regional Banks by FY2025
We developed projections for lending and deposit changes for 101 regional banks over thelong term. As the first step we established two models explaining past lending and deposit changes(see Table 2). The descriptions of variables can be found in Table 3. Estimation results are shown in
Table 4 for loan and Table 5 for deposit.
We then proceeded to estimate the possible changes of lending and deposit between FYs 2013
and 2025 for each bank. Estimation results of Equation No.4 were employed for both Model 1 (loan)and Model 2 (deposit). As for the projections of the variables, for the ratio of ordinary profit to total
assets, we took the average of the three fiscal years from 2011 to 2013. Population projection by the
National Institute of Population and Social Security Research were used for the future population
and working-age population of the prefectures where the banks are headquartered. For long-term
interest rates and prefectural GDP figures, we set the figures based on the JCER’s Medium-Term
Economic Forecasts. As for the constants reflecting the fixed effects of individual banks, we usedthe values obtained from the estimation formula.
Table 2. Estimation models
Model 1 (loan)
Model 2 (deposit)
Bank’s loan growth
Bank's deposit growth
Bank's profit ratio (recurring profit/total asset)
Real GDP growth of the prefecture in which bank's headquarter is based
Total population (or working-age population) growth of the prefecture in whichbank's headquarter is based
Other independent variablesεResidual term

Table 3. Details of variables
Variable
Description
loanBank's loan
depositBank's deposit

profitBank's profit ratio

realgdp/pop

Real GDP per capita

cpi

CPI

r10y_yield

Real interest rate

Value
Bank's loan at end of reference fiscal year
(million yen)Bank's deposit at end of reference fiscal year
(million yen)Bank's ordninary profit of reference fiscal year
(million yen)/Total asset of reference fiscal year
(million yen)
Real gross domestic production of prefecture(million yen)/Total prefectural population(thousands), reference year
National consumer price index, year-on-yearchange (%)
10-year Japanese government bond yield at endof reference year (%) - National consumer priceindex, year-on-year change (%)

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pop
w_age
pref_loan/pop
pref_depo/pop
no_regbk
ctybk_lshareshinkin_lshareja_lshare
ctybk_dshareshinkin_dshareja_dshare
post_dshare
ctybk_branch/pop
shinkin_branch/pop
ja_branch/pop
post_branch/pop

Prefectural population
Prefectural
working-age population
Total loan per capita
in prefecture
Deposit per capita in
prefecture
Number of regionalbanks in prefecture
City banks' share in
total loan in prefecture
Shinkins' share in
total loan in prefecture
JA's share in totalloan in prefecture
City banks' share in
total deposit inprefecture
Shinkins' share in
total deposit inprefecture
JA's share in total
deposit in prefecture
Japan Post Bank's
share in total deposit inprefecture
No. of city banks
branches per capita
No. of Shinkinbranches per capita
No. of JA branches
per capita
No. of Japan Post
Bank branches per
capitaTotal prefectural population (thousands)
Total prefectural working-age population(thousands)
Total loan in prefecture (hundred millionyen)/Total prefectural population (thousands)
Total deposit in prefecture (hundred millionyen)/Total prefectural population (thousands)
Number of regional banks that base their
headquarters in prefecture, reference year
City banks' share in total loan by commercial
financial institutions in prefecture (%)
Shinkins' share in total loan commercial
financial institutions in prefecture (%)
JA's share in total loan commercial financial
institutions in prefecture (%)
City banks' share in total deposit of commercial
financial institutions in prefecture (%)
Shinkins' share in total deposit of commercial
financial institutions in prefecture (%)
JA's share in total deposit of commercial
financial institutions in prefecture (%)
Japan Post Bank's share in total deposit ofcommercial financial institutions in prefecture (%)
Number of city banks branches in
prefecture/Total prefectural population(thousands)
Number of Shinkin branches in prefecture/Total
prefectural population (thousands)
Number of JA branches in prefecture/Total
prefectural population (thousands)
Number of Japan Post Bank branches in
prefecture/Total prefectural population(thousands)

Note: "Prefecture" signifies the prefecture in which the referred bank's headquarter is based
Source: Cabinet Office, Government of Japan, Prefectural Accounts, Statistics Bureau, Ministry of Internal Affairs
and Communications, Population Estimates, Bank of Japan, Deposits, Vault Cash, and Loans and Bills
Discounted by Prefecture (Domestically Licensed Banks), NEEDS-Financial Quest, Corporate Financial Data
(TANSHIN/YUHO) (Incl. Shinkin Banks), Foreign exchange and Interest Rates, The Financial Journal
Co.,Ltd., Financial Map

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Table 4. Estimation results for Model 1(loan)
Dependant variable
Estimation period (year)
Equation no.
No. of samples
profitdlog(realgdp/pop)
dlog(cpi)
r10y_yielddlog(pop)
dlog(w_age)
dlog(pref_loan/pop)
ctybk_lshareshinkin_lshareja_lshare
ctybk_branch/pop
shinkin_branch/pop
ja_branch/pop
R-squareddlog(loan)
1980～2011 1986～2011 1980～2011 1986～2011 1999～2011 1998～2011 1998～2011
1
2
3
4
5
6
7
3865
3100
3865
3100
1429
1545
1548
1.17***
0.98***
1.08***
0.94***
0.50***
0.46***
0.46***
0.41***
0.43***
0.34***
0.38***
0.04
0.04
0.04
0.85***
0.86***
0.01***
0.01***-0.01***-0.01***-0.01***
2.90***
2.08***
1.92***
1.97***-0.38**-0.62***-0.53***
0.29***-0.00***-0.00**-0.00***
0.07-0.32*-0.09***
0.43
0.36
0.46
0.40
0.46
0.40
0.40

Note: * denotes significance at 10% level, ** denotes significance at 5% level, *** denotes significance at 1% level.

Table 5. Estimation results for Model 2(deposits)
Dependant variable
Estimation period (year)
Equation no.
No. of samples
profitdlog(realgdp/pop)
dlog(cpi)
r10y_yielddlog(pop)
dlog(w_age)
dlog(pref_depo/pop)
no_regbk
ctybk_dshareshinkin_dshareja_dshare
post_dshare
ctybk_branch/pop
shinkin_branch/pop
ja_branch/pop
post_branch/pop
R-squareddlog(deposit)
1980～2011 1986～2011 1980～2011 1986～2011 1999～2011 1986～2011 1998～2011 1998～2011
1
2
3
4
5
6
7
8
3865
3100
3866
3100
1428
3100
1546
1548
2.54***
2.32***
2.45***
2.29***
1.60***
2.29***
1.24***
1.31***
0.34***
0.31***
0.27***
0.26***-0.02
0.26***-0.03-0.01
0.60***
0.57***
0.01***
0.01***-0.00
0.01***-0.00*-0.00
2.36***
0.61
1.82***
1.66***
0.20
1.71***
0.13
0.26
0.62***-0.00*-0.01***-0.00***-0.01***-0.00***-0.16
0.23-0.08**-1.04***
0.41
0.41
0.43
0.43
0.80
0.43
0.58
0.58

Note: * denotes significance at 10% level, ** denotes significance at 5% level, *** denotes significance at 1% level.

Our estimation suggests that business strategies assuming continued credit demand growth areless likely to succeed in the future (see Figure 4). Out of the 101 banks, 68 banks or nearly 70% ofthem are expected to see lending decrease in FY 2025 compared to 2013. Meanwhile, 32 banks arelikely to see deposits fall over the same period.

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Figure 4. Loan and deposit projections for Regional Banks, changes over FY 2013 to 2025
50

(number of banks)loandeposit

45
40
35
30
25
20
15
10
5
0
loss of 20% or
more

10-20% loss

0-10% loss

0-10% gain

10-20% gain

20-50% gain

50-100% gain

gain of 100% ormore

5. Housing Loans Market Must Grapple with Falling Populations
5.1. Empirical Analysis: Both First- and Second-Tier Regional Banks Could Take Losses on Loans
Banks have been attempting to compensate for the failing growth of corporate loans byexpanding housing loans. Growth in regional banks’ housing loans has been particularly dramatic;
since July 2012, their lending in this sector has outpaced that of city banks.
In this section, we analyze the profitability of introductory 10-year fixed-rate loans (those
whose interest rates are fixed for the first 10 years after issuance).Given the current low interest rate,
the benefits of fixed-rate loans for borrowers are considerable. In our model, we posit a 35-year term,with repayment made via equal monthly payments with interest.
For the first 10 years, the procurement interest rate for housing loans is set at the swap rate(the LIBOR yen-yen swap rate). As it is unclear whether borrowers will opt for a fixed or a floating
rate from the eleventh year on, we set the rate at the average interest paid on deposits and bonds overthe most recent five years from FY2009 to FY2013. The credit risk of each bank is also factored into
this procurement interest rate.
The conditional prepayment rate (CPR) is based on the Prepayment Standard Japan (PSJ)
Model created by the Japan Securities Dealers Association. It is impossible to cover all credit risk
with warranty fees alone, so assuming that a portion of this risk will be borne by the banks, we set
the default rate at 30 basis points (0.3%) for first-tier regional banks and 38.5 basis points (0.385%)
for second-tier regional banks. In addition, we consider the attributes of the lending targets based on
the ratio of risk-monitored loans for both first- and second-tier regional banks.
In line with the method used by Tozaka and Mio (2008)1, we calculate profitability of loans
with a 6% PSJ model. This projects that CPR will climb by 10 basis points (0.1%) each month,remaining at 600 basis points (6%) from month 60 onward. No fees are levied for prepayment. Suchprepayment is followed by a reduction in the equal monthly payments with interest and no change tothe term of the loan. The present discounted value of the outstanding loan is calculated based on zero
coupon yields.
1

Tozaka Hironobu and Hitoshi Mio(2008) “Ginko-no Jutaku Loan wo meguru saikin no doukou to risk kanrijou no
kadai” Bank of Japan Review 2008-J-14

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Figure 5 shows profitability for housing loan products in the first year of the lending. Whenthe preferential interest rate spread is taken into account, both first- and second-tier regional banks
see profitability fall into negative territory. A comparison of the two groups shows that their lending
rates are around the same, but the second-tier regional banks, with their higher costs, are deeper inthe red.
Figure 5. Profitability for housing loan products in the first year of the lending(basis points)
300
ordinaryretail rates

200
100

97.9

85.2

procurement
interest

0-100

warranty
fees

-64.6

-70.2

-200

personnel
expenses
rates
preferential
interest
rates spread

-300
-400

first-tier regional banks
second-tier regional banks
ordinary retail rates
preferential interest rates spreadpersonnel expenses rates
procurement interest rates
warranty fees
profitability in case preferential interest rates are applied
profitability in case ordinary retail rates are applied
Source：Bank websites, interviews on banks, NEEDS-Financial QUEST, Nikkei Quick, Japanese Bankers
Associations “National bank financial statements analysis”

5.2. Preferential Rates Can Push Profitability into Red for Entire Loan Term
Looking at profitability over the entire loan term, with the preferential interest rate spread,
both first- and second-tier regional banks again see negative profitability (Figure 6). The second-tierregional banks are even deeper in the red. When preferential interest rates are applied, theintroductory fixed-rate period shows a particular trend toward the red, and as a result the loans tend
to lose money over their entire term. In cases where ordinary retail rates are applied, meanwhile,
both first- and second-tier regional banks can make a profit over the entire term of the loans.

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Figure 6. Profitability for housing loan products for entire loan term

30

first-tier regional banks(basis points)

second-tier regional banks（RHS：basis points）

160

20

140

10

120

0

100

-10

80

-20

60

-30

40

-40

20

-50

0

-60

-20
131.5
3%PSJ

105.6
88
60.1
39.1
25.7
6%PSJ
9%PSJ
3%PSJ
6%PSJ
9%PSJ
after the introductory fixed-rate period
the introductory fixed-rate period
profitability in case preferential interest rates are applied
profitability in case ordinary retail rates are applied(RHS)

Source: Bank websites, interviews on banks, NEEDS-Financial QUEST, Nikkei Quick, Japanese Bankers
Association “National bank financial statements analysis”

The banks have been expanding their preferential rate offers for the loans’ introductory
periods in an effort to win reliable customers. And with the exception of a handful of banks, they
have been extending slightly better rates to customers even after the introductory periods come to an
end. All of this spurs banks on to compete still more energetically in the interest rate race, pointing
to a situation where most of them will be unable to make profit from their lending.

6. Japan Post Bank Enters the Loan BusinessDespite the expected shrink of lending opportunities caused by population decline in various
regions of Japan over medium to long term, Japan Post Bank appears set to make a full-fledged entry
to the financing field, particularly in the area of home loans. Japan Post Bank has a nationwide reachand abundant financial resources, making it all the more likely that it will go head to head against
other financial institutions in each region (see Figure7).

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Figure 7. Comparison with the private sector leading （Year ending March 2014）

Source: Companies Annual Report, Ministry of Land Infrastructure Transport and Tourism

The Japanese Bankers Association and National Association of Shinkin Banks have noted that“the approval of Japan Post Bank’s entry into new retail fields such as lending could bring disorderto regional finance and lead to greater burdens on the public,” urging the Japan Postal Privatization
Committee to be cautious in deciding what will be allowed. As seen in Figure8, financial institutions
have been competing more aggressively in the home lending field, an area that has seen a steadydecline in private housing investment since the mid-1990s. Japan Post Bank’s entry into housing
loan operations could heat up this competition still more.
Figure 8. Amount of mortgage origination and private residential investment
40
35
30

（Trillion Yen）
Other financial institution
Labour Banks
Shinkin banks and Credit Cooperatives
Japan Housing Finance Agency [Purchase Program, Guarantee Program]
Japan Housing Finance Agency [Direct Origination]
Domestically licensed banks
Real private residential investment

25
20
15
10
5

（F.Y.）

0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Notes: “Domestically licensed banks” are city banks, first-tier regional banks, second-tier regional banks, trust banks,
long-term credit banks and trust accounts. “Shinkin banks and Credit Cooperatives” are shinkin banks,
Shinkin Central Bank, credit cooperatives and the Shinkumi Federation Bank. "Other financial institutions"
are National Mutual Insurance Federation of Agricultural Cooperatives, life insurance companies, non-life
insurance company, housing loan companies, local governments, Welfare and Medical Service Agency,
Organization for Workers Retirement Allowance Mutual Aid and Okinawa Development Finance Company.
Source: Japan Housing Finance Agency

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7. Reforming Agricultural Cooperatives to Invigorate Regional Agriculture
7.1. Considering the Joint-Stock Company Route for The Norinchukin Bank and JA SHINREN, JA
ZENKYOREN
The Abe administration is tackling the task of reforming JA(Japan Agricultural Cooperatives),
the nation’s network of agricultural cooperatives. As of the end of FY2013, there were 738
corporations with a total of 9.98 million union members handling the so-called three JA businesses:
agricultural cooperative activities, credit operations, and mutual insurance. JA has its hands in manybusiness areas, including arrangements for weddings, funerals, and other ceremonies, travel agency
operations, hospital management, automobile sales, and real estate brokerage. Currently theregulations that keep private-sector financial institutions and insurance firms from entering otherbusiness fields, or from offering both life and nonlife insurance products, are not applied to JA. The
Abe administration is considering the joint-stock company route for the JA banking system ; theNorinchukin Bank(Central Cooperative Bank for Agriculture, Forestry and Fisheries), JA Shinren(Prefectural Credit Federations of Agricultural Cooperatives), and JA Zenkyoren (National Welfare
Federation of Agricultural Cooperatives).
7.2. JA Membership: A Majority of Non-farming Associate Members
A look at the JA membership shows that while full members, the category of membershipgranted to active farmers, have been falling in number recently, associate members not involved inagriculture are on the rise. The associate membership surpassed the full membership in 2009, and to
this day the majority of JA members are associates. These associates cannot take part indecision-making on JA management issues, but they can make use of JA services so long as they
provide capital to the organization. JA’s credit operations (its financial services) offer products that
often have better terms than those of other financial institutions, creating an incentive fornonfarming residents of a community to make use of the JA system as associates.
In FY2012, the total pretax income for JA as a whole amounted to ¥238.9 billion. Of thisamount, credit operations provided ¥251.0 billion and mutual assistance operations ¥152.4 billion;
meanwhile, the cooperative activities (agriculture- and lifestyle-related business) lost ¥51.7 billion
and farm management guidance activities lost ¥112.7 billion. The losses incurred by the services forfarming full members, namely cooperative activities and the guidance provided through Zenchu, theCentral Union of Agricultural Cooperatives, are covered by the profitable financial activities (credit
and mutual aid).
The JA Bank group is seeing a decline in the share of its lending directed to agriculturalconcerns. At the same time, the proportion of long-term lending in JA’s overall credit operations
consisting of housing loans has been rising year after year, and as of FY2013 stands at 50.8%. Thismeans that the red ink that JA bleeds in its agriculture-related operations for farming full members iscovered by the profits from financial services (credit and mutual aid) used mainly by non-farming
associate members. What is more, the associate members have no say in the management of theorganization, which means that the full members are the ones deciding that the funds will be used inthis way. The current situation in the JA differs widely from its original purpose as a collective
organization. This deviation has a considerable influence on the operations of regional banks andother regional financial institutions.

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8. Rising Pressure to Shift Business Models
As the population shrinks, leaving little chance for the pie to grow in the traditional banking
fields of lending and deposits, we will likely see continuing tie-ups and mergers among regionalbanks within the same prefecture and even extending over wider regions. For regional financial
institutions to secure long-term, continued growth, they will need to shift from a defensive to an
offensive stance. By providing capital to prospective fields such as agriculture, medical and nursing
care they can revitalize Japan’s regions that face the challenge of population drain. It is precisely
here that the true role of regional finance lies. Today these banks are showing relatively healthyfinancials. They must seize this chance to make full use of their deep roots in their home regions andcreate new capital demand.

Reference Works:
Berlemann, M., Oestmann, M. and Thum, M. (2010) “Demographic Change and Bank Profitability.
Empirical Evidence from German Savings Banks” CESIFO Working Paper No. 2911

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