The Report of the Financial System's Council Working Group on "Strengthening Regional Financial Capabilities"
Released on December 18, 2025, the final report of the Financial Services Agency’s "Working Group on Strengthening Regional Financial Capabilities" outlines a comprehensive strategy to fortify Japan's regional banking sector against the headwinds of severe demographic decline and economic contraction. The document argues that for regional economies to survive, local financial institutions must evolve beyond their traditional lending roles to become multifaceted hubs of consulting, human resources support, and digital transformation. The working group emphasizes that while regional banks currently maintain sufficient soundness, the disparity in performance is widening, particularly among credit unions and credit associations, necessitating urgent structural and legislative reforms.
A central pillar of the report is the imperative for financial institutions to drive corporate value and solve regional issues actively. The working group explicitly calls for a departure from the industry's historic over-reliance on collateral and personal guarantees from business owners. Instead, the report champions "business value-based lending," a shift anticipated to accelerate with the enforcement of the Enterprise Value Charge Act in May 2026, which allows lending against the entirety of a business's cash flow and intangible assets. Furthermore, the committee advocates for aggressive support in the areas of M&A and business succession to prevent the closure of profitable firms due to a lack of heirs, as well as the promotion of "venture debt" to support the startup ecosystem. The report also introduces the concept of supporting "Local Zebra" companies—businesses that balance social impact with profitability—and urges banks to participate in public-private urban planning initiatives.
On the regulatory and structural front, the report proposes significant legislative amendments to the Act on Strengthening Financial Functions. Most notably, it recommends extending the application deadline for the capital participation system and the fund grant system, which are currently set to expire in March 2026. The extension is viewed as essential to provide a safety net for institutions undertaking drastic business restructuring, such as mergers and integrations. The report suggests that these systems should not only be prolonged but also expanded to cover standalone efficiency improvements and system sharing arrangements, recognizing that operational joint ventures are vital for smaller institutions to maintain viability. Additionally, the group advises the permanent establishment of special provisions for disaster response, ensuring capital can be injected rapidly in the event of large-scale catastrophes like a Nankai Trough earthquake.
However, this continued public support comes with heightened expectations for governance and monitoring. The report strikes a stern tone regarding management accountability, referencing past misuse of the system, and recommends stricter oversight mechanisms. This includes a review of the "Early Warning System" to focus more on future sustainability rather than just current capital adequacy, and the establishment of a specialized monitoring office for cooperative financial institutions. The working group also touches upon modernizing the banking workforce, encouraging the adoption of Generative AI to boost efficiency and permitting bank employees to engage in side jobs to diversify their skills and local connections. The Financial Services Agency is expected to formulate a "Regional Finance Strengthening Plan" by the end of the year based on these recommendations, signaling a pivotal shift in how Japan intends to safeguard its regional economic infrastructure.
Norbert Gehrke
