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Further consolidation among Japan’s regional banks is inevitable given a rapidly ageing population and ultra-low interest rates, an adviser to the country’s financial regulator said.

The Bank of Japan’s radical stimulus programme, 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 Naoki Ohgo, who advises Japan’s Financial Services Agency (FSA).

“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 told Reuters on Friday.

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

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

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 ultra-low interest rates.

“There’s not much time left” for regional banks to take steps to survive the hit from an ageing population 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 ultra-easy policy to destabilize the country’s 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 among one of candidates for next BOJ governor.

The BOJ added yield curve control (YCC) last year to its massive asset-buying programme to achieve its elusive 2 percent inflation target. It now buys bonds to guide short-term interest rates at minus 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 an ageing population, with the younger generation leaving for bigger cities as many firms shut down factories in regional Japan.

A draft FSA report obtained by Reuters showed 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 monetary easing wasn’t enough to generate inflation,” said Ohgo.

“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.”

Re-disseminated by The Asian Banker from Reuters