Further consolidation among Japan’s regional banks is inevitable given the rapidly aging population and ultralow interest rates, according to an adviser to the Financial Services Agency.

The Bank of Japan’s radical stimulus program, which has pushed interest rates to near or below zero, is severely cutting into bank profits and could destabilize the sector in the not so distant future, said FSA adviser Naoki Ohgo.

“There are only a handful of regional banks successfully making money in niche areas,” while many others are struggling to find new business models, Ohgo said in an interview Friday.

More regional banks should consolidate not only to cut costs, but also to restructure their businesses and boost profitability, he said.

“Consolidation is inevitable and a good thing,” Ohgo said.

The remarks are one of the most blunt warnings among financial regulators of the dire prospects for Japan’s crowded regional banking sector, underscoring the challenges smaller banks face in surviving a business environment made difficult by years of ultralow interest rates.

“There’s not much time left” for regional banks to take steps to survive the graying of society and dwindling margins, said Ohgo, a private consultant who also advises several local governments.

Unless regional banks boost profitability, it “might not take long” for prolonged ultraeasy policy to destabilize the banking sector, he said.

Ohgo is a close associate of FSA Commissioner Nobuchika Mori, who has called for speedier banking-sector reform and is considered a candidate for BOJ governor.

The BOJ added yield curve control last year to its massive asset-buying program to achieve its elusive 2-percent inflation target. It now buys bonds to guide short-term interest rates at below zero percent and long-term rates around zero.

The radical monetary experiment has squeezed the more than 100 regional banks whose local economies are slumping due to the aging population, with the younger generation leaving for bigger cities as many firms shut down factories in regional Japan.

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

“Despite abundant supply of cash in the economy, inflation did not reach 2 percent. It’s clear that monetary easing wasn’t enough to generate inflation,” Ohgo said.

“When you’ve failed to meet your target and the demerits start to exceed benefits, you’ll have to focus on addressing the demerits of policy.”

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