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Moody's: Plans to stress test Japan regional banks is credit positive

Japan's Financial Services Agency's plans to take regional banks' future profitability into consideration when conducting stress tests is credit positive for the lenders as it will spur them to boost profitability, Moody's said March 22.

The FSA plans to conduct stress tests on regional banks' future profitability and will require banks with weak results to explain how they plan to improve their profitability. This move will push banks to make the necessary changes to improve profitability as they might receive an order from the FSA if they are slow in carrying out reforms.

Structural challenges such as ultra-low interest rates and an aging population have impacted Japanese regional banks' profitability. The best option for regional banks facing the most pressure in their earnings may be to merge with other banks, Moody's said. The rating agency expects an acceleration in the consolidation of regional banks.