Central bank policy shift: Japan's regional banks face major challenges and new opportunities.

As Japan,State Administration of Foreign Exchange official website exchange rate query the world's third-largest economy, gradually moves toward the normalization of its monetary policy, especially after years of extensive easing policies, the country's financial regulatory bodies will closely monitor the impact of central bank policies on regional banks.

The Financial Services Agency (FSA) of Japan, in its annual policy outlook, emphasized that it would monitor the financial markets and customer situations in real time, focusing on their effects on the profitability and asset health of regional banks.

Last month, the Bank of Japan (BOJ) adjusted its Yield Curve Control (YCC) policy, allowing greater fluctuations in the yield of Japan's major government bonds. Although officially positioned as a means to maintain easing policies, financial markets widely interpret this as a precursor to the end of decades of ultra-loose monetary policy.

If the Bank of Japan or Japanese authorities end decades of ultra-loose monetary policy, this could lead to the first increase in Japan's interest rates in decades. An increase in interest rates could lead to greater unrealized losses on domestic bonds held by Japanese banks, although these losses could be offset by higher net interest margins in their lending business.

While large banks have already shortened the duration of their bond portfolios to cope with potential rises in government bond yields and interest rates, analysts point out that some smaller regional banks may lack this flexibility, leaving them vulnerable to the risks posed by rising bond yields and interest rates.

The FSA clearly states in its policy outlook that it will actively encourage regional banks to take necessary measures in advance to adapt to potential changes in financial and economic conditions.

The FSA's annual policy outlook not only provides guidance for regulatory bodies, banks, and other financial institutions but also summarizes upcoming policy adjustments.

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