Twenty years after the financial system crisis that saw the collapse of major institutions such as Yamaichi Securities and Hokkaido Takushoku Bank, the nation’s big banking groups are moving to substantially reduce their workforce and domestic outlets in response to the changing business environment. The massive nonperforming loan woes that disrupted the banking sector in the 1990s have been mostly resolved after an injection of taxpayer money and a temporary nationalization of some banks. Major banks have been consolidated into three megabank groups, and the financial system seems to be much more stable. But the streamlining efforts by the big banks reflect their sense of crisis over the industry’s future. They should consider whether streamlining alone is enough to survive the tightening industry climate.

The failures of Yamaichi, one of the nation’s top four brokerage firms, and Hokkaido Takushoku, one of the “city” major banks, in November 1997 symbolized the financial industry mess under the weight of bad assets in the wake of the collapse of the asset-inflated bubble boom in the early 1990s. The government responded to the growing uncertainties over the financial system by injecting a massive amount of taxpayer money into the troubled banks and placing some of them under temporary state control.

Today, the financial crisis of 1997 may look like a thing of the past. Since 2012, Japan’s economy has experienced what is assessed as the second-longest boom cycle in postwar history. As major companies report record profits on the strength of brisk overseas demand and the weak yen, the Nikkei average on the Tokyo Stock Exchange soared to another 26-year high this week, although concern simmers over the brewing of yet another real estate market bubble.

The prospects of the banking sector do not look all that bright, however. In recent months, the megabank groups have announced plans to cut thousands of jobs and close outlets over the next several years. Mizuho Financial Group says it plans to reduce its employees including part-time staff, who numbered 79,000 at the end of last March, by roughly 19,000 by the end of fiscal 2026, and cut the number of the group banks’ outlets nationwide by about 100 to some 400 by the end of March 2025. Similarly, Mitsubishi UFJ Financial Group will cut its 40,000-plus workforce by 6,000 by the end of the 2023 business year. Combined with Sumitomo Mitsui Financial Group, which earlier said its would slash the workload equivalent of 4,000 jobs by the end of fiscal 2019, the total number of jobs cut could add up to some 30,000 among the major banking groups.

Behind the streamlining plans by the major banks is the sector’s difficult business climate. The ultra-low interest rates under the Bank of Japan’s unprecedented monetary easing policy have reduced the lending margin on bank loans, which is not expected to significantly recover again anytime soon. In addition to the tough prospects for the future demand of bank loans due to the declining population, the advance of internet banking has reduced the labor-intensive counter work at bank outlets. In the April-September period, the combined net profit on mainstay business of the five major banking groups including Mizuho, Mitsubishi UFJ and Sumitomo Mitsui fell nearly 28 percent from a year earlier. In the face of thinning profits, the banks aim to achieve greater efficiency by replacing clerical jobs with artificial intelligence and other technology.

But if what’s happening in the banking sector is the collapse of its old business model, the banks should consider whether cutting back on jobs and outlets will be a sufficient response. With the progress in new financial technology and greater use of AI, such services as settlements and money transfers are no longer going to be the monopoly of the financial industry and will likely see more competition from other sectors.

The prospects are even more difficult for regional banks and smaller institutions, which face an even steeper decline in funding demands from customers in areas where depopulation is progressing much faster than the national average. Many of these banks have long competed with each other to lend to a limited pool of clients by offering lower loan rates. This competition has hurt their profitability, and according to an estimate by the Financial Services Agency, more than half of the nation’s regional banks incurred losses on their mainstay lending and other business in fiscal 2016.

Some of the regional banks are seeking to survive the tightening business landscape by merging and integrating their operations with each other. That may be one solution, but they will also need to fundamentally review their business model to respond to the changing environment of their industry.

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