Japan’s banking crisis is over, although more regional consolidation is needed in the sector, says Fitch Ratings in a report published today.

In the report, Fitch says that with growing deregulation in the post-‘bubble’ period, the Japanese banking sector has gradually transformed into a modern financial services industry comparable with other major developed countries’, although the banks are still struggling to build their own successful business models. Fitch believes the regional bank sector and other smaller deposit taking institutions will see substantial strategic consolidation in what is still a fragmented banking system.

Fitch explains the liberalization of Japan’s banking regulations, which began in the late 1970s, was too slow to cope with the rapid developments in financial markets. It believes this contributed to the asset price bubble of the 1980s. And, in turn, this delayed economic recovery in the 1990s and ultimately crippled the banking system between 1995 and 2004.

The crisis in the Japanese banking system began to surface in 1995 when credit cooperatives failed and the Bank of Japan stepped in and extended special loans. Since then, 172 deposit taking institutions, including banks, have failed. The government has spent 5% of Japan’s gross domestic product to protect senior creditors from losses arising from bank failures and an additional 2% of the GDP to prevent the banking system from melting down, it reports.

“However, with Japan’s economic outlook improving, the corporate sector having gone through a major period of restructuring, particularly in the weaker sectors such as construction, real estate and retailing, and the banks having recognized and provided for or written off a substantial proportion of their bad loans, the authorities ended the temporary measures to support depositors as of April 1,” it says. Fitch believes that in future, this date will be considered the end of Japan’s banking crisis.

There are about 1,500 small deposit-taking institutions and a giant government-owned postal saving system, it notes. “The privatization of the postal system is underway and could have a substantial impact on the banking sector, particularly if the post office is allowed to compete for loan business as well as deposits,” Fitch says. “However, the process will take another 12 years, and the ultimate pace and form of privatization could still change significantly depending on political debate.” Consequently, Fitch believes that the current banking landscape in Japan is still in flux and will continue to evolve.