Photo/Illutration The Bank of Japan headquarters in Tokyo's Chuo Ward (Asahi Shimbun file photo)

Regional banks and other types of community-based financial institutions have a major role to play in regional economies.

The public sector should provide assistance to similar financial institutions to help them recover from the COVID-19 crisis. It should, by the way, use an appropriate method in doing so.

The Bank of Japan has decided to set up a new mechanism for assisting regional financial institutions.

The central bank said it will add the equivalent of 0.1 percent per year to interest on current account deposits held at the BOJ by regional banks and other similar financial institutions that have strengthened their business foundations while at the same time supporting regional economies.

The measure, which has a limited time frame of three years starting in fiscal 2020, would cost about 50 billion yen ($478 million) in total a year if all the regional banks and credit unions were to utilize it. 

Eligible financial institutions are required either to lower the ratio of overhead costs to gross operating profits by at least 4 percent over three years or to strengthen their business foundations by means of business integration or other steps.

The central bank said it will monitor the applicants’ track records while providing assistance to them and disclose the names of the banks that have benefited from the mechanism.

Regional financial institutions are facing an increasingly tougher business environment. In addition to a sustained tendency for depopulation and sluggish regional economies, they are also facing a global trend for low interest rates, including in the monetary policy of the BOJ itself, which has all but eliminated their profit margins.

On top of all that came the coronavirus crisis.

The Law on Special Measures for Strengthening Financial Functions has already been amended to keep in place and reinforce an existing framework for injecting public funds into regional financial institutions. A separate special law has also been enacted to exempt integration and mergers of regional banks from the Anti-Monopoly Law.

Stability of financial systems represents a key foundation of the economy. We have no objection to the very stance for taking every possible step, and working out additional policy measures, to ensure their stability.

But the BOJ’s new mechanism resembles, by nature, subsidies, albeit conditional, to a specific group of businesses. If there is a need for similar measures, they would be better implemented in the form of fiscal spending, which is to be approved only after discussions in the Diet.

The government, in the meantime, reportedly has separate plans for subsidizing investment in systems so as to promote business integration of regional banks and other financial institutions. The pair of measures should be discussed in a package.

It is true a central bank, which has the authority to supply currency at its discretion, is expected to be the “lender of last resort” in the event of a financial crisis. We are, however, not yet in a situation where a crisis is threatening to immediately erupt.

And let’s recall that the BOJ has imposed a certain set of rigorous requirements even when it extended special loans at times of crisis.

Furthermore, the level of interest rates on current account deposits at the BOJ, which the central bank is planning to use as an instrument of the assistance measures, is also a key tool of monetary policy for stabilizing prices. It is none other than the BOJ itself that decided that part of those interest rates should be lowered into negative territory as part of macroeconomic policy.

The consistency and reliability of BOJ policy could be called into question if those interest rates were to be raised on the contrary, albeit partially.

All these circumstances notwithstanding, the decision-making process remains nontransparent for the new mechanism, which officials insist does not equate to monetary policy.

At the very least, the BOJ should discuss the subject thoroughly at its monetary policy meetings and have its governor fulfill his accountability.

A failure to do so could create a problem for the future role of the central bank.

--The Asahi Shimbun, Nov. 15