The First Meeting of the Financial System Council's Working Group on Strengthening Regional Financial Power

Norbert Gehrke

08 Sep 2025 — 8 min read

The first meeting of the Financial System Council's Working Group on Strengthening Regional Financial Power was held on Friday, September 5, 2025, focusing on the evolving role of regional financial institutions in Japan's regional revitalization efforts and the profound implications of accelerating population decline on urban and regional development.

Regional financial institutions are being encouraged and enabled to expand their business scope and consulting functions to support local businesses, including through M&A, business succession, and future-oriented lending.

However, these institutions face a challenging operating environment marked by stagnating deposits, increasing non-competitive costs (e.g., cybersecurity, AML), and emerging signs of business performance bifurcation.

Concurrently, Japan is experiencing an accelerating demographic decline, with projections indicating a significant reduction in total population and a dramatic shift in urban distribution, leading to a concentration in fewer, more distant large cities and the potential for widespread "ghost towns."

This necessitates a strategic "triage" approach to regional policy, moving beyond a one-size-fits-all "local revitalization 2.0" to a focused strategy of consolidation, smart growth, and planned contraction for certain areas.

I. Regional Financial Institutions: Evolving Role and Challenges

1. Initiatives for Regional Revitalization

Regional financial institutions are being actively supported and encouraged to expand their involvement in regional revitalization. This includes relaxation of business scope regulations through amendments to the Banking Act (2016, 2021) that have eased restrictions on the types of businesses banks can invest in or operate through "banking business advanced companies" (銀行業高度化等会社), allowing for:

Equity ownership exceeding 5% (with approval).
For "certain advanced services" (一定の高度化等業務), the approval criteria have been relaxed, allowing up to 50% equity ownership without approval, and even 100% for non-listed regional revitalization businesses.
"Certain advanced services" include FinTech, regional trading companies (原則、在庫保有、製造・加工なし - "in principle, no inventory holding, manufacturing, or processing"), disability employment promotion special subsidiaries, adult guardianship, registered temporary staffing, sales of proprietary apps/IT systems, data analysis/marketing/advertising, ATM maintenance, and digital local creation/sustainable society building. These are services where "banks and bank groups are expected to play a significant role" and are "socially reasonable given their connection to financial services," without "significant risk of other business risks, abuse of dominant position, or conflict of interest."

Promoting Support for Business Challenges

Shift from COVID-19 liquidity support to "full-scale management improvement and business revitalization support."

Proactive and early engagement with businesses showing "signs of change," offering solutions, and collaborating with credit guarantee corporations and other financial institutions.
Strengthening consulting functions, including offering comprehensive solutions leveraging public schemes and continuous monitoring.

Promoting M&A Support

Increased expectation for financial institutions to actively engage in M&A support, including Post-Merger Integration (PMI).

Amendments to supervision guidelines (effective Oct 1, 2024) clarify expectations for financial institutions to explain how management guarantees can be lifted when principal shareholders change, addressing concerns that such guarantees hinder M&A and business succession.

Promoting Business-Oriented Lending

Emphasis on "business-oriented lending" (事業性融資) that focuses on the growth potential and future prospects of businesses, rather than solely on real estate collateral or management guarantees.

This is crucial for "start-ups lacking tangible assets" and "businesses hesitant to undertake bold business development due to management guarantees."
Promotion of schemes like "corporate value collateral rights" (企業価値担保権) to facilitate financing based on business future prospects and strengths.

Examples of Local Revitalization Initiatives

Regional trading companies supporting branding and interior design orders for traditional crafts.

On-demand transportation services in depopulated areas.
Accompaniment support for SMEs with high technical capabilities, including strategic advice and subsidy acquisition support.
DX promotion for local craft manufacturing, introducing cloud systems for process management.
PPP/PFI-based urban development projects.

2. Financial Performance and Operating Environment

While regional financial institutions are adapting, they face a challenging environment:

Stagnating Deposits: "Regional financial institutions' deposit amounts are stagnating against the backdrop of population decline." Since 2021, the number of institutions experiencing a decrease in individual deposits has risen, particularly for shinkin banks and credit unions where decreasing institutions now outnumber increasing ones.
Bifurcation of Business Performance: "There are signs of bifurcation in the business performance of regional financial institutions." A negative correlation exists between deposit size and expense ratio (OHR). Stock prices of top-tier regional banks (by deposit volume) have performed significantly better than lower-tier ones.
Increasing Non-Competitive Costs: Risk response costs for areas like cybersecurity and anti-money laundering (AML) are rising regardless of institution size. The number of suspicious transaction reports has steadily increased. There is a concern that "the rise in costs in non-competitive areas will continue." Regional banks and shinkin banks, in particular, show "relatively lower investment in security measures" compared to city banks.
Consolidation and Environmental Improvement: Measures such as the Anti-Monopoly Law Special Exception Act (allowing mergers without Anti-Monopoly Law application under certain conditions), funding schemes (up to 3 billion JPY for mergers/integrations), and further revisions to business scope regulations aim to "ensure regional financial institutions can fully exercise their required role." There has been a significant reduction in the total number of regional financial institutions (from 1,002 in Mar 1990 to 495 in Mar 2025).

3. Future Financial Administration Policy (2025 Administrative Year)

The Financial Services Agency aims to further strengthen "regional financial power" (地域金融力) by:

Promoting collaboration between regional financial institutions and external players with diverse knowledge (both domestic and international, public and private) to foster globally competitive local businesses.
Continuing meticulous support for local SMEs and promoting local revitalization initiatives.
Enhancing M&A and business succession support, including inter-institutional collaboration.
Addressing common challenges through "jointization" (共同化) to suppress costs and enable smaller institutions to focus on customer support. This includes exploring joint risk management, internal audits (e.g., for AML, cyber), and widespread system sharing.
Considering extensions and expansions of existing capital participation and funding schemes, while ensuring "appropriate management and business operations" of recipient institutions.

II. Japan's Regional Future Under Population Decline

1. Accelerating Population Decline

Japan faces a severe and accelerating population decline:

Current Situation: The 2024 birth rate is 1.15, indicating that "even low-end estimates are optimistic." Japan's population of residents is projected to decrease by 900,000 in 2024-25, and the total population (including immigrants) by 550,000. This is "the pace of one prefecture disappearing every year." Projections suggest the Japanese population could disappear in 150 years and Japan itself in 250 years, with "no expectation of population replacement by immigrants."
Demographic Shift: Projections show a significant decline across all regions, with a relative concentration in the Tokyo metropolitan area but still a sharp decline in absolute numbers.

2. Urban Distribution and Future Concentration

Power Law Distribution: Japanese cities exhibit a "power law" distribution of population, meaning that larger cities grow larger and smaller cities shrink. "The pattern of urban rise and fall is simple."
Future Urban Landscape: Based on population decline, decreasing logistics/communication costs, and increasing human movement costs, future urban populations are predicted to concentrate in "fewer, more distant large cities."
- Number of 100,000+ population cities: 83 (2020) -> 68 (2050) -> 26 (2120)
- Number of 500,000+ population cities: 21 (2020) -> 14 (2050) -> 6 (2120)
- Number of 1,000,000+ population cities: 11 (2020) -> 8 (2050) -> 4 (2120) – specifically Tokyo, Nagoya, Osaka, and Fukuoka.
Flattening of Cities: Urban areas are expected to "flatten," with decreasing population density in both city centers and suburbs (Tokyo example: 20,000-15,000 persons/km2 in 1970/2020 to 10,000-5,000 in 2120, and 2,000-1,000 to 1,000-500).

3. Inadequacy of Current Regional Policies and Need for "Triage"

Current "Local Revitalization 2.0" efforts, which aim for growth in all regions through "compact cities" and inter-regional cooperation, are deemed insufficient:

Failure of "Local Revitalization 2.0"

"All-encompassing, non-selective regional creation?" The approach of "compacting individual regions (cities)" and "complementing through wide-area cooperation between regions" is unlikely to lead to growth in all regions under population decline. "Half of municipalities will see their 'compacted city centers become ruins,'" and "80% of municipalities will decline."

Ineffectiveness of Infrastructure Investment - High-speed transportation networks: Connecting local areas to Tokyo often leads to a "straw effect" (ストロー効果), further concentrating population in Tokyo. With population decline, increased travel costs between local areas and Tokyo will further exacerbate this.
High-rise urban redevelopment: While aiming for compactness, sophistication, and international competitiveness, population decline and decreasing communication/transport costs reduce the benefits of dense accumulation, potentially leading to suburbanization and "excess supply/ruins of high-rise buildings." "There is no reason for central urban land prices to continue rising."

Need for Selection and Concentration

"Maintaining many regions across the board is difficult." This path "will lead to many regions becoming ghost towns." Instead, regions should be "reconfigured and consolidated around sustainable urban centers."

Sustainable Cities

A city size threshold of approximately 30,000 people is identified as necessary to sustain essential services like obstetrics, funeral services, supermarkets, convenience stores, and cleaning services. By 2120, a significant number of municipalities (885 out of 1808 in 2020) will no longer contain a sustainable city, and many more will decline.

Regional Economic Triage

A strategic "triage" approach is necessary to identify which cities will remain in 50 or 100 years and prioritize them. This involves:

"Concrete consolidation plans" for shrinking regions.
"How to soft-land areas that are folded."
A specific question posed is: "What are the concrete methods for centralizing financial services in hub cities and enabling self-sustaining decentralization in shrinking regions?"

III. Key Takeaways and Discussion Points

Expanded Role of Regional Financial Institutions

Regional banks are shifting from traditional lending to a broader role as comprehensive partners in regional revitalization, offering diverse consulting, M&A support, and business-oriented lending, enabled by regulatory easing.

Mounting Pressures on Regional Financial Institutions

Despite the expanded role, these institutions face significant internal and external challenges including stagnating deposits, rising non-competitive costs (cybersecurity, AML), and increasing disparities in business performance.

Critical Need for Strategic Urban Planning

The accelerating population decline necessitates a radical shift in regional policy from a "grow everywhere" mindset to one of "selection and concentration" – a "triage" for urban development. This means identifying future urban hubs, managing the decline of other areas, and investing in resilience and smart, low-rise urban design rather than continued high-rise development.

Interdependence of Financial and Urban Policy

The future of regional financial institutions is intrinsically linked to the future shape of Japan's regions. The question of "how to strengthen the management base of regional financial institutions themselves" to fulfill their role in supporting shrinking regions and concentrated urban centers is critical.

Call for Concrete Solutions

The Working Group explicitly asks for discussion on:

The role of regional financial institutions in supporting regions facing population decline and other environmental changes.
How to strengthen the management base of regional financial institutions themselves to fulfill their required role.
Specifically, how to centralize financial services in hub cities while fostering self-sustaining decentralization in shrinking areas.