Different types of banks and their functionsCommercial banks are regulated under the banking act and supervised by Japan’s primary financial regulator, the Financial Services Agency (FSA). They are classified into different categories, depending on their function and historical origin.
Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group, and Mizuho Financial Group represent Japan’s largest banking groups. Along with Japan Post Bank, the three megabanks are among the major players globally in terms of total assets. City banks, which include the core banking units of the megabanks operate nationwide and on a global scale, while regional banks typically focus on a single region and provide banking services to local residents and small and medium-sized businesses. For historical reasons, regional banks are divided into first and second-tier regional banks, although they perform the same functions. Trust banks offer trust-related services in addition to standard banking services. On top of this, there are a large number of cooperative financial institutions such as shinkin banks, agricultural cooperatives, and credit unions.
Recent development of the banking sectorThe low interest rate policy pursued by the Bank of Japan and declining demand for loans due to Japan’s aging and shrinking population have resulted in falling profits of the banking industry over the past decade. Regional banks are particularly affected by the demographic change and declining economic activity in rural areas. This is why the government and the Bank of Japan have encouraged consolidations among the over 100 different regional banks scattered around Japan’s 47 prefectures.
The coronavirus (COVID-19) pandemic accelerated the pressure on banks to cut costs, as more consumers turned to digital channels, and cost-effective online banks increased in popularity. Next to looking for business opportunities overseas, conventional Japanese banks have initiated cost-cutting measures to compensate for the decline in revenues. These measures include restructuring business operations, reducing the number of branches, downsizing, and promoting digital services.