THE coronavirus pandemic is deepening the pain for Japan’s regional lenders, heightening concerns that a potential wave of business closures will test policymakers’ ability to avert a damaging banking-sector crisis.

Many central government and bank officials see the risk of a crisis emerging in the next few months, when more struggling firms could go under and hit regional banks already weakened by a shrinking domestic economy and years of ultra-low interest rates.

Yet officials still have few plans besides prodding the ailing lenders to recapitalize or consolidate — and little clue on how to do this in an orderly fashion, say five government and banking sources with direct knowledge of the matter.

“Banks are aggressively lending now because the government is asking them to, but that could change once it becomes clearer some companies cannot survive,” one of the people said.

“The key test will come in autumn, when liquidity problems turn into solvency problems.”

With Tokyo still encouraging regional banks to pump money to needy borrowers, efforts to mitigate a subsequent build-up of bad loans will take a back seat, another source said.

“In the end, there’s no other option besides prodding the weaker banks to consolidate, restructure themselves or seek government capital,” the second person said.

A wall of money printed by the central bank has kept a lid on bankruptcies and job losses, even as Japan’s recession deepens.

But the prolonged battle with COVID-19 is straining even the strongest regional banks in places like Osaka and Kyoto.

Regional economies are more vulnerable to shocks than big cities because of their over-reliance on sectors such as tourism, and fewer jobs as more firms move out of ageing, dwindling local markets.

After Japan closed its borders to contain the pandemic, Osaka-based hotel chain White Bear Family went under with 27.8 billion yen (US$262 million) in liabilities, the biggest virus-related bankruptcy so far in Japan.

That left regional lender Kansai Mirai Financial Group with 800 million yen in unrecoverable loans. The group expects credit costs to nearly triple to 12.5 billion yen this year.

Osaka saw 147 companies go under in June, exceeding Tokyo as the hardest hit center in Japan, according to think tank Tokyo Shoko Research.

“The damage from the pandemic [on the region’s economy] will probably last for two years,” Kansai Mirai president Tetsuya Kan said. (SD-Agencies)