Photo/IllutrationBank of Japan Governor Haruhiko Kuroda responds to a question at a Nov. 5 news conference in Nagoya. (Tomohiro Yamamoto)

NAGOYA--Bank of Japan Governor Haruhiko Kuroda warned that the central bank’s drawn-out ultra-easy monetary policy could eventually seriously damage local financial institutions and destabilize the entire market.

In a lecture here on Nov. 5, the central bank chief said that although there is no immediate danger, difficult management problems could arise at local financial institutions from decreases in loan revenues.

Kuroda said the low interest rates produced by the monetary easing policy would “have a cumulative effect on the financial strength of financial institutions.”

To gain revenues or avoid possible losses, banks and other financial institutions might increase the number of risky loans or become more conservative about extending any loans, he said.

Such a situation could cause major instability in the overall financial system, leading to “the risk of stagnant financial intermediation,” Kuroda said.

He said the risk right now might not be very large, but there is a need to keep a careful eye on future developments.

In a news conference after his lecture, Kuroda pointed out that regional financial institutions have continued to post decreases in operating revenues through loans.

He said those institutions have been able to cover the lower revenues by selling off securities. He also said they have been helped by a decrease in the number of corporate clients that went bankrupt, in part due to the five-year period of the BOJ’s ultra-easy monetary policy.

But he said such developments “will not likely continue forever.”

Kuroda also said regional financial institutions face other major issues linked to the declining populations in their communities, adding that there will likely be more talks about mergers among such institutions.