• Reuters

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Bank of Japan Gov. Haruhiko Kuroda warned Monday that declining profits at regional banks could hurt the economy by potentially destabilizing the financial system.

Regional banks’ core profitability has continued to fall due to prolonged low interest rates, the shrinking population and a falling number of firms operating in various regions, Kuroda said in a speech at a Tokyo seminar.

“We should be mindful of the possible consequences, including any downward pressure on the real economy from the financial system,” he said.

Subdued price growth has forced the BOJ to maintain its massive stimulus program despite the rising costs, such as the hit to bank profits from years of near-zero interest rates. Kuroda said the BOJ is mindful of the danger that prolonged low rates could squeeze bank profits and prompt some of them to take excessive risk.

“If appropriate risk management measures are not taken … credit costs could rise sharply and the stability of the financial system could be threatened” in the event of a severe economic shock, he said.

As for the economy, Kuroda said it is “doing quite well,” with the job market near full employment and firms enjoying historically high profits. But he repeated the BOJ will maintain its ultra-loose monetary policy as inflation avoids its 2 percent target.

“Price development is going to be affected by many factors, not just by monetary policy” but by various supply and demand shocks, Kuroda said. “But the BOJ, or any central bank, is responsible for achieving price stability in the medium to long term.”

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