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WASHINGTON (Kyodo) The realignment of Japanese banks is expected to accelerate as lenders strengthen their retail banking businesses through mergers and alliances, the International Monetary Fund stated in a report on Wednesday.

“Major banks are increasingly focusing on efforts to improve profitability, and most look to retail banking, including small and medium-sized enterprises and mortgage loans, for attractive opportunities,” the IMF said of the Japanese banking industry in its semiannual Global Financial Stability Report.

“This trend may likely prompt further consolidation among Japanese financial institutions, and recent mergers and the formation of alliances represent attempts to broaden retail franchises.” This was an apparent reference to a planned merger between Mitsubishi Tokyo Financial Group Inc. and UFJ Holdings Inc.

Mitsubishi Tokyo and UFJ signed a merger agreement in August, a move that would create the largest financial group in the world in October next year.

The IMF said Japan’s recent introduction of legislation aimed at injecting public funds into undercapitalized banks will also help promote consolidation among regional banks as well as between regional and major banks.

“The scheme is designed to provide a strong incentive for weaker regional banks to merge with healthier peers,” the Washington-based institution said.

The IMF also stated that the disposal of nonperforming loans at Japanese banks is moving forward, reflecting “improved corporate profitability and further progress in restructuring delinquent borrowers.”

The IMF said global financial markets have remained stable despite interest rate hikes by the U.S. Federal Reserve.

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