Of course, consolidation has played a role in reducing Japanese representation in the Top 1000, but two decades of extreme monetary easing and recapitalisation has nonetheless failed to sustain the relative size of Japanese bank capital. But low profitability is the major obstacle to growth, and has also left Japanese banks relatively poorly capitalised.
Even though the average capital adequacy ratio of the Japanese banking system has increased 35% since 1996, it is still only 4.81%, in comparison with close to 10% in the US for 2010 data. The shift to Basel III compliance, with its requirements for higher and better quality capital, is going to be tough for Japan.
As yet, the effect of the earthquake and tsunami on bank loan loss rates is unknown. Since the earthquake, the Bank of Japan has made Y55,600bn available in short-term funds in less than a week, more than the amount of financial assistance injected by the Deposit Insurance Agency in the past 22 years. But the weak capital adequacy and net income of Japanese banks even before the disaster leaves them with very little to cushion the impact.