This month, Japanese digital lender Sony Bank began offering customers a yen deposit account with a taster annualised interest rate of 10.52 per cent — a startling return in a country where savings have earned almost nothing for nearly two decades.

For many of Japan’s 62 regional banks, such aggressive competition from online challengers threatens to spark an exodus of deposits at a time when higher benchmark interest rates overseas and the end of negative rates at home are fuelling concerns about the quality of their assets and the viability of their weakest borrowers.

An outflow of deposits would add to the challenges facing regional banks and Japan’s 264 shinkin co-operatives, already threatened by demographic change and the loss of population to Tokyo and other big cities.

At regional lender Shizuoka Financial Group’s earnings presentation in May, chief executive Hisashi Shibata said it was losing some retail deposits to digital banks and pledged to strengthen efforts to prevent outflows.

The same month Jimoto Holdings, which operates two regional banks in northeastern Japan, was in effect brought under state control after logging its biggest loss and failing to repay funds owed to the government.

Jimoto blamed its losses on hits to its overseas bond portfolio from rates that remain much higher in the US and Europe than a few years ago and on deterioration of its Japanese borrowers’ businesses.

“There could be more cases like Jimoto,” warned the chief executive of one regional bank. “While the financial system is stable at the moment, authorities do have a sense of crisis and if they see a risk, they will nip it in the bud.”

While investors, credit rating agencies and Japanese authorities have historically paid close attention to the potential fragility of regional banks’ assets, they have not needed to worry much about deposit flight. 

But Japan’s online banks have recorded accelerating growth in deposits and account openings. So far in 2024, Rakuten Bank, for example, has opened some 800,000 accounts.

Analysts say elderly Japanese people are increasingly opening online bank accounts with help from their adult children, posing a threat to regional banks that have a relatively old customer base.

A man looks at his phone next to a fire cistern sign
The spread of online banking makes it easier for customers to move their deposits © Charly Triballeau/AFP via Getty Images

David Threadgold, Japanese banks analyst at Keefe, Bruyette & Woods, said the shift by many regional bank customers to online banking meant they had “immeasurably greater” ability to move money just as competition for deposits mounts.

“Traditional banks do want to move people on to devices because that makes it easier to close branches and ATMs. What that means, though, is that they’ve created an ecosystem that makes it extremely easy for existing customers to go elsewhere,” said Threadgold.

For the Bank of Japan, which in March raised borrowing costs for the first time since 2007, concern about the health of regional lenders is a reason to be cautious about further rate increases.

“For many banks, a rise in interest rates will have a positive impact on their financial conditions when their interest rate-related assets and liabilities come up for renewal,” the central bank said in its most recent Financial System Report.

However, in a comment widely understood to refer to the regional banks, the bank highlighted “uncertainty over the stickiness of deposits”.

Officials at Japan’s Financial Services Agency say there is no evidence yet of a serious exodus of deposits from regional banks towards online lenders or Japan’s three megabanks. They also note that the high taster rates offered by some digital banks will not be sustainable.  

Kensuke Ogawa, an analyst at Moody’s Ratings, played down any immediate risk of large outflows.

While smaller regional banks and Shinkin co-operatives had lost deposit market share to megabanks, the regional banks that Moody’s rates had large pools of loyal customers whose salaries or pensions were paid into their accounts, he said. 

“Despite competition from megabanks and new entrants, rated regional banks’ deposit market share has remained broadly steady over the past five years,” Ogawa said.

An elderly farmer works in a misty field
Japanese regional banks have a relatively elderly customer base © Buddhika Weerasinghe/Getty Images

Analysts say the online banks, which are lower-cost operations than regional banks, are offering extraordinary rates in the hopes of winning a bigger future prize: the wave of inheritance that will occur over the next 10 to 15 years from Japan’s postwar baby boomer generation.

According to the BoJ, roughly half of all Japan’s financial assets are held by the over-60s, and about a quarter by the over-70s. When elderly people in the regions die, say analysts, their money is going to be inherited by a generation more likely to bank either at a megabank or digital bank. 

“The stronger regional banks will be OK, but it is a potentially big long-term problem for the smaller ones, and we are already starting to see outflows from the kind of agricultural banks where elderly farmers keep their savings,” said the head of one of Japan’s online financial institutions.

Takashi Miwa, senior economist at Nomura, said the risks were gathering around regional banks. “Will there be movement of deposits out of the regional banks? Definitely in the future,” he said.

Line chart of bankruptcies by month showing higher borrowing costs put pressure on Japanese companies

Analysts say another concern is the quality of assets that regional banks have amassed during Japan’s long period of zero interest rates and the loans they have offered to local businesses.

Underlying such worries, agricultural lender Norinchukin, which has an investment approach often echoed by regional banks, said on Wednesday it might sell up to ¥10tn ($63bn) in US and European government bonds after its portfolio was hit by higher interest rates.

Norinchukin warned it would incur an annual loss of about ¥1.5tn — triple what it forecast a month ago.

Bankruptcies in Japan have also risen in recent months due to a severe labour shortage and mounting costs caused by the weaker yen. Higher borrowing costs could put further pressure on corporate balance sheets — and some analysts say the default ratio for small and medium-sized enterprises is rising in a way that could harm second-tier regional banks and financial co-operatives. 

Additional reporting by David Keohane in Tokyo



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