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Regional Banks in Japan are set for consolidation

Interview - May 19, 2017

Mr. Ishii, President of North Pacific Bank shares his perspectives on how the regions are dealing with this transformation and how the process took place in Hokkaido


What is your personal point of view about the impact of Abenomics on the banking sector and what is your strategy to overcome the challenges posed by negative interest rates?             

Abenomics has three arrows. The first pillar is the monetary policy with unprecedented quantitative easing.  The second is an expanionary fiscal policy; and the third, the structural reform to spur growth of the private sector. I believe the first two were somewhat effective. The yen weakened, the stock market recovered, and jobs were generated.  However, the third pillar has not yet borne fruit sufficiently. It is still a challenge. Personally, in order to emerge from the long deflationary period Japan has been experiencing, I believe it is critical to raise the potential of the country’s economic growth.

Japan’s population is decreasing. Therefore, the focus should be on policies and innovations in order to raise productivity. A significant enhancement in the productivity rate can outweight the lower rate of the working population. As the potential economic growth rises, so too will demand.  Spurred demand increases production which attracts more investment that leads to wage increases and consumers spending increases.  If we have such a favorable economic cycle, I believe, we will emerge from deflation. We have not reached the goal of structural reforms yet.

Because of the current monetary policy, the difference between the interest rates for loans and deposits for the banks is so small. Banks are facing a tough situation and working on various counter measurements. But this is a transitional period in order to finally depart from the long period of deflation.


Many banking systems around the world are facing a consolidation process because of squeezed profit margins and growing online banking services:  how are these trends affecting North Pacific Bank?

The consolidation process of the banking system in Hokkaido is already complete. There used to be one city bank called Hokkaido Takushoku Bank and three regional banks including Hokuyo, Hokkaido, Sapporo that has now become North Pacific (Hokuyo) and Hokkaido. Because of the consolidation, North Pacific became the largest bank in Hokkaido and acquired a very strong business foothold on we’ve been working on in order to capitalize and improve profitability.  Also, taking advantage of the strong clients’ base, we’ve been trying to overcome the challenges we are facing in the banking sector. Today, going after a large volume of deposits or lending does not contribute to profit. A lean management structure is critical to today’s challenges and we’ve been working on that. 


2017 will be the year of North Pacific Bank’s 100th anniversary. How would you describe North Pacific Bank’s contribution to the socio-economic development of Hokkaido?

As a regional bank, our mission is to support the sustainable growth of Hokkaido’s economy.  Our management philosophy is “the foundation for the borderless development of Hokkaido”. It has been our philosophy for the last 100 years and will be for another 100, 200 years to come. However, we also realize that the world has been changing so rapidly and in a multi-faceted way. So we need to be flexible to proactively embrace these changes.

The population of Hokkaido today is 5.4 million.  About 150 years ago, when Hokkaido started developing, it was only 500,000.  It grew by 10 times in the last century. There are only few places in the world that have seen such a fast increase in population, and we believe the potential of Hokkaido is extremely high.

In the post WWII era, the main industries in Hokkaido were coal mining driven by the national government’s energy policy and fisheries also supported by the government.  Today, we have diversified into tourism, agriculture, and food processing based on agricultural and marine products.  Also in terms of energy, Hokkaido has great potential for producing renewable energy, especially solar power. Also, the strong wind in winter on the coast of the Japan Sea contributes to wind generated power. Hokkaido also has a geographical advantage for the arctic ocean sea route.  The prefecture is capitalizing on its comparative advantages both domestically and overseas. It is our role to tap into this reputation and support businesses with their efforts in becoming global. 

Hokkaido’s landscapes are unique and we plan to support the tourism industry, which will play a more important role in GDP growth in the coming years.  Morevoer, we plan to expand into ASEAN countries where the population is increasing. Finally, by strengthening strategic alliances we also want to support economic interchanges in North America and Europe.


What are the strategic objectives and diversification plan of your mid-term business plan called: “New Challenges: Creating New Values for Hokkaido and Seeking Growth Together”?

As I mentioned before our bank has an overwhelmingly large market share in this region. Our objective is to capitalize on Hokkaido’s strengths, such as safe and high-quality food items that are marketable globally; high toursim potential, and renewable energy development. It is a big opportunity to think from the perspective of how you apply the strength to these advantages to yield the maximum synergy and support local businesses.

However, Hokkaido has a weakness too.  Historically, Hokkaido was developed through the national government’s financial support. Because of this, secondary industry especially in terms of manufacturing is weak. Therefore, North Pacific Bank is acting as an intermediator between the seocnd-tier manufacturing and first-class “monozukuri” companies.  Thus, we would like to grow the manufacturing sector in Hokkaido.

On the other hand, there are some good manufacturing businesses in the region. For such companies we not only lend, but also invest in their equities. Thirdly, we host business meetings to raise the level of technology.  These are the actions we are taking to improve the manufacturing sector.

Hokkaido is our motherland.  We must make it stronger no matter what.  And make it stronger from the global perspective.


How is North Pacific bank taking advantage of the potential of internet-based services by investing in the increasingly important financial technology (FinTech) and other online services?

We always consider how to improve our services qualitatively and quantitatively, and IoT represents a good opportunity. We would like to leverage the Internet and FinTech to improve our services. As our industry faces a tough situation where the profit margin is so thin, we must leverage information technology which leads to a productivity increase and then to a change in cost structure.

Specifically, we have alliances with Japanese, American and European banks with advanced FinTech capability for product development. Also in order to save development cost we have an allilance called the “Tsubasa Alliance” for developing AI and user authentification capabilities using biometrics. All banks in this Alliance are the number one bank in their respective region, namely Chiba, Toho, Iyo, Chugoku, Daishi.  


Despite being a regional bank, the need of Hokkaido-based companies to go global has driven North Pacific Bank to do the same. Could you please tell us the reasons behind the decision of expanding your business in the US?

We launched an operation in Hawaii through an alliance with the Central Pacific Bank.  First, because Hawaii is a world class vacation area, and Hokkaido is hoping to be one some day. Second, there are many companies from Hokkaido that opened up businesses in Hawaii and we want to support them.  For example, the largest popular bakery in Hawaii is from Sapporo. They use flour from Hokkaido. There are also other businesses that use food ingredients from Hokkaido.  These companies are very appraciated and are building a great reputation. Another example: there is a business that sells Hokkaido’s food to hotels in Hawaii which is served to customers from all over the world. Moreover, travel agencies in Hawaii want to increase tourism in Hokkaido. As such there are various businesses and the synergy is growing in both countries. These are the reasons for the alliance with Central Pacific Bank.

I believe some Hokkaido companies are planning to expand into the mainland US using Hawaii’s operations as their base.  By the same token, there may be some businesses in Hawaii that may want to expand into Hokkaido. North Pacific Bank can support both needs. This globalizing need is transforming business everywhere around the world and we need to take it into account as well. It may be difficult to directly build a network to support such activities, but it is possible through alliances.


What is the role of the American market in your future growth strategy?

We do not just look at the US market.  We look at areas with growth in the world. We look at ASEAN but also Russia, for instance.  We watch the directions our clients are going or what moves they are taking in order to provide excellent support.

We would like to become the destination of choice for FDI in various industries. For this reason, Hokkaido needs to reach out to US companies with investment opportunities. It is critical that we always have win-win situations.


What would you like the Americans to know better about Japan and Hokkaido?

I believe because of the Internet, information about Japan’s attractions is already well known. However,  I would like American tourists to actually see them and taste them on their own by visiting Japan and Hokkaido. I would like them to experience our quality food and natural beauty first hand. If they did, I’m 100% positive that they will like them and come back again and again. And, with respect to Hokkaido, we must be ready to welcome and host them with our distinctive omotenashi spirit–namely treat a guest with elevated politeness that makes the guest feel valued and respected. To that end, North Pacific Bank is working to develop a unique Hokkaido’s omotenashi service.