TOKYO, Oct 23 (Reuters) - Japanese banks lag behind their global counterparts in boosting profitability as they compete for dwinding lending opportunities in a shrinking market, the country's central bank said on Monday.
Prolonged ultra-loose monetary policy has squeezed margins of financial institutions in many advanced economies including Japan, where its central bank caps borrowing costs at zero percent through aggressive money printing to reflate growth.
But structural factors are also behind declining profits at Japanese banks which, if left unaddressed, could destabilise the banking system, the Bank of Japan said.
"Financial institutions in advanced economies with low interest rates are all facing falling profitability. But global comparisions show profitability is particularly low in Japan," the central bank said in a semi-annual report analysing the banking system.
"Japanese banks may be saddled with an excess of employees and outlets, which is intensifying competition within the industry and hurting profitability," it said.
Many regional banks lack major sources of revenue beyond lending, as they struggle to charge transaction and advisory fees to customers unaccustomed to paying money for such services, the report said.
Financial services fees make up just 0.01 percentage point of Japan's consumer price index, far less than 0.23 of a percentage point in the United States and 1.20 of a percentage point in Britain, the report showed.
Faced with low inflation and tepid economic growth, many central banks like the BOJ, the Federal Reserve and the European Central Bank, have adopted unconventional monetary easing steps since the global financial crisis in 2008.
While the measures were necessary to revive growth, the resulting plunge in interest rates has hurt profits at financial institutions by narrowing their margins.
The problem is more acute in Japan, where just over 100 regional banks compete in an overcrowded market that is shrinking amid a rapidly ageing population.
BOJ Governor Haruhiko Kuroda offered a rare warning in February that low profitability at financial institutions could sow the seeds of a new financial crisis, adding that mergers and consolidation may be among future options. (Reporting by Leika Kihara; Editing by Sam Holmes)