Bank of Japan's proposal to reward regional lenders for mergers or more aggressive cost-cutting with an additional interest rate of 0.1% on their deposits at the central bank is too little to incentivize more consolidation of struggling lenders, analysts say.

The bank, or BOJ, said Nov. 10 that it will pay higher interest on current account balances to regional banks and credit unions that decide to merge or integrate with one another or show improvement in financial health such as increased earnings or lower overhead costs. Currently, the central bank pays interest rates of between 0.1% and negative 0.1% on deposits placed by regional banks and credit unions.

Few regional banks may take action and merge as the offered interest rate is unattractive, Toyoki Sameshima, a senior analyst at SBI Securities Co., said.

After years of struggling with weak loan growth and low interest rates, the coronavirus pandemic has put regional banks in even tougher situation. Many small and midsize local lenders posted profit declines or losses in the fiscal first half through September, according to Takehide Kiuchi, executive economist at Nomura Research Institute.

The BOJ offer "may support regional banks that are already in merger talks but won't to be a tailwind for others to prompt a merger," said Kiuchi, who was also a member of the central bank's policy committee. "BOJ just showed a stance to cooperate with the government" to encourage regional banks to consolidate for survival, he added.

Sixty-three Japanese regional banks had outstanding deposits of ¥55.7 trillion at the central bank in September, according to the BOJ.

Too little

An official at a major Japanese regional bank, who asked not to be named, told S&P Global Market Intelligence that "the incentives are better than nothing, so we'll try to cut costs." But he added that the 0.1% interest rate is little to prompt a merger.

Eligible lenders will be required to cut overhead costs by more than 1% in the current fiscal year through March 2021 from the previous year, more than 3% in the following fiscal year and more than 4% in the fiscal year ending in March 2023.

Yoshihide Suga, Japanese prime minister, said in September that there are "too many" regional banks and consolidation could be "one option" for them to improve their operations.

The government has been nudging small and midsize banks to consolidate for survival. A new law that exempts mergers between banks in the same prefecture from antitrust rules will take effect on Nov. 27.

As early as summer of next year, the Japanese government also plans to offer subsidies of up to about ¥3 billion each to spur more mergers among regional lenders and credit unions, The Nikkei reported Nov. 12. The subsidies will cover part of their transition costs such as expenses in system integration, among other things.

As of Nov. 16, US$1 was equivalent to ¥104.57.