In the wake of the collapse of Silicon Valley Bank and recent turmoil at Credit Suisse, the past few weeks have seen heightened scrutiny of Japan’s financial sector and reignited interest in the challenges faced by regional banks.

While experts say Japan is unlikely to suffer from the structural banking challenges seen in the United States, exposure to foreign securities combined with rising U.S. interest rates have left regional banks weakened and at risk of valuation losses.

These factors have exacerbated the already challenging market conditions faced by regional banks. With a declining population, profit pressures amid the ultralow interest rate policy of the Bank of Japan, and pandemic assistance measures set to expire, regional banks were already under considerable pressure.

Even prior to recent concerns of a brewing financial crisis, the Japanese government had undertaken policy steps to strengthen the foundations of regional banks, encouraging consolidation as it rolled out exemptions from the Antimonopoly Act and set up a support service for mergers and restructuring in 2020.

Aomori Bank and Michinoku Bank plan to merge by 2024 as they contend with a “declining birthrate, aging population, and shrinking workforce.” And on Feb. 3, the Bank of Yokohama, a part of Concordia Financial Group, announced plans to take over Kanagawa Bank via a tender offer.

In 2022, Aichi Bank and Chukyo Bank established a holding company ahead of a merger intended to “leverage an expanded market share ... respond to changes in the management environment ...and (improve) profitability.”

While regional banks in Japan are being pushed to consolidate in order to survive, experts say a collapse similar to that of SVB is unlikely, as they lack the same risk profiles.

Graeme Knowd, an independent financial expert, said that in Japan the incentive is to maintain financial stability.

Officials are “comfortable with (a) low-risk, low-return system, and do look at how regional banks are making profits,” he said, noting that the Bank of Japan has a financial stability mandate.

While the country experienced banking failures in its financial crisis in 1997, the woes of Suruga bank and Incubator Bank of Japan in 2018 and 2010, respectively, did not lead to contagion, Knowd said.

In Japan, management is also more incentivized “for their bank to survive,” he said.

“Given the C-suites at Japanese regional banks have very little equity in the bank, and salaries — while good by Japanese standards — are not stellar, they have no incentive to take risk,” he said, noting that managers in their 50s likely recall Japan’s banking crises after the bubble economy burst in the early 90’s.

Given their experience navigating financial turmoil, officials and experts have said that Japan’s financial institutions are largely well placed to weather the storm.

Confidence in Japan’s financial system appears mostly undented despite large listed Japanese banks taking a hit as Asian financial markets floundered.

This overarching confidence may stem from the fundamental role the financial institutions play in the Japanese economy.

Harry Ishihara, a macro strategist consultant for Macrobond and JPX, said roughly 70% of U.S. corporate funding is from the capital markets, and around only 30% funded by banks, while in Japan and continental Europe that picture is reversed, making the U.S. something of an outlier.

“For continental Europe and Japan, where the banking system is so crucial to the economy, it’s natural for the government and regulators to be protective of banks,” Ishihara said.

In the U.S., banking regulations are under the magnifying glass after the fall of SVB, with some questioning the impact of a deregulatory push in 2018.

“All money flows through banks, which really form the heart of the economy,” Ishihara said of the situation in Japan. “They take the blood in the form of deposits and they pump it out with oxygen into the economy. If the heart stops, the economy stops.”