Japan and advanced Asia Pacific economies seek growth through regional expansion and digital transformation
As 2025 approaches, the banking sector in Japan is navigating a period of economic stagnation and transformation.
Persistent low growth, deflationary pressures and the evolving role of digital finance are shaping the strategies of banks. The Bank of Japan (BOJ) is expected to continue to normalise monetary policies, supporting lending and economic activity, while financial institutions increasingly look to Southeast Asia and other emerging markets for expansion.
In contrast, other advanced economies in Asia Pacific—South Korea, Singapore, and Australia—are pursuing growth strategies driven by technological innovation, trade expansion and regional leadership. South Korea’s banks are strengthening their positions in digital finance and regional partnerships. Singapore’s financial institutions continue to expand across Asia, reinforcing their role in global finance. Australian banks are focusing on regional expansion and sustainable investments, particularly in the Pacific.
While Japan contends with internal economic constraints, South Korea, Singapore and Australia are adopting outward-looking strategies to drive growth. This divergence highlights the evolving banking landscape in Asia Pacific, where digital transformation, green finance and regional diversification are shaping the sector’s future.
Economic outlook
The IMF has projected that Japan’s GDP will grow by 1.1% in 2025, a modest improvement driven by increased real wages and consumer spending. However, challenges persist. Japan’s economy has faced supply disruptions in the auto industry and the fading one-off boost from a surge in tourism, which have contributed to the slowdown in 2024. The IMF has revised its growth forecasts for South Korea, projecting a 2.0% expansion in 2025, down from an earlier estimate of 2.2%. This adjustment reflects concerns over external uncertainties and a sluggish recovery in domestic demand.
Meanwhile, according to IMF, Singapore is forecasted to grow 2.5% in 2025, reflecting its stronger ties to global trade and technology sectors. As banks confront low domestic demand, they are accelerating investments in fintech partnerships, digital banking services and regional acquisitions to diversify revenue streams.
The financial sectors of Japan and its neighbours are also responding to the increasing global focus on climate finance and sustainable development. Although the green finance market in the region lags behind Europe, efforts to align with global sustainability targets are gaining momentum. Banks are expanding their portfolios to include ESG-linked loans and green bonds, driven by regulatory incentives and investor demand.
Japan’s economic outlook for 2025 reflects a continuation of slow growth, underpinned by low inflation and ageing demographics. Despite government efforts to stimulate demand through fiscal measures and corporate tax incentives, the nation’s heavy reliance on exports makes it vulnerable to external economic shocks. The BOJ is expected to continue its monetary policy normalisation into 2025, with projections indicating a gradual increase in interest rates, to 1% by July 2025, following expected incremental hikes in December 2024 and April 2025.
This shift is likely to have a positive impact on the Japanese banking sector. Higher interest rates can improve banks’ net interest margins, leading to increased profitability. Major Japanese banks, such as Mitsubishi UFJ Financial Group (MUFG) and Sumitomo Mitsui Financial Group (SMFG), have already projected significant net profit increases for the fiscal year beginning April 2025, attributing this optimism to diversified income sources abroad and the normalisation of interest rates.
However, the BOJ has also produced estimates indicating that future rate hikes could temporarily impact its earnings. For instance, if short-term borrowing costs rise to 2%, the BOJ could face a temporary loss of up to $13 billion. This underscores the need for a cautious and measured approach to policy adjustments to maintain financial stability.
The BOJ’s anticipated monetary policy trajectory for 2025 suggests a continuation of gradual interest rate increases, which are expected to bolster the profitability of Japanese banks. Nonetheless, careful calibration of these policy changes will be essential to mitigate potential risks to financial stability.
Nevertheless, banks in Japan are facing slowing growth in domestic markets, driven by shrinking loan demand and narrow interest margins. To offset these challenges, major institutions such as MUFG, SMFG and Mizuho are increasing their investments in overseas markets, particularly in Southeast Asia and Latin America. The expansion into Indonesia, Vietnam and the Philippines reflects a strategic shift toward regions with higher growth potential and expanding middle-class populations.
Meanwhile, Australia’s GDP is projected to grow by 2.1% in 2025, driven by stable domestic demand and ongoing investments in green and digital infrastructure. Australian banks continue to expand regionally, with particular focus on the Pacific Islands. Westpac is reinforcing its operations in Papua New Guinea (PNG) and Fiji, aligning with Australia’s strategic interests in maintaining a stable financial presence in the Pacific. ANZ, as the largest lender in the region, remains actively engaged with the Australian government to sustain its extensive operations across nine Pacific nations.
Challenges and risks
However, despite these efforts, Australian banks are bracing for significant challenges in 2025. The Reserve Bank of Australia’s (RBA) interest rate policies will play a crucial role in determining bank valuations and profitability. While the financial sector performed strongly in 2024, rate cuts in 2025 could prompt investors to shift capital to other sectors, leading to potential declines in bank share prices by as much as 30%. Inflated valuations, coupled with muted earnings growth projected at just 1% to 2% annually over the next five years, are raising concerns about the sector’s stability.
Despite these advancements, regulatory fragmentation remains a challenge. While Japan’s banking sector adheres to domestic liquidity and capital requirements, financial institutions operating in Southeast Asia must navigate varied regulatory frameworks across multiple jurisdictions. This complexity increases compliance costs and limits the speed at which Japanese banks can scale their operations abroad.
In Australia, intense competition, particularly in the home loan market, is another pressing issue. National Australia Bank (NAB) recently reported a fall in annual profits, citing rising deposit costs and fierce competition that continue to pressure margins. In addition to market competition, operational hurdles persist. Banks are undertaking major EFTPOS network updates, requiring customer cooperation to prevent service disruptions, further complicating operational continuity.
Regulatory pressures are increasing as well. Ongoing reviews into small and medium-sized banks are aimed at addressing competitiveness and scale limitations, with regulators pushing for enhanced oversight. Simultaneously, banks are heavily investing in digital transformation and sustainable finance initiatives to adapt to evolving market demands. While necessary for long-term growth, these initiatives require significant upfront capital, potentially impacting short-term profitability.
The banking sectors in Japan and other advanced economies face a range of structural challenges that threaten long-term stability. One of the most pressing issues is demographic decline in Japan, which is reducing domestic consumption and labour market growth. As the population continues to age, loan demand is expected to shrink further, limiting banks’ ability to grow their domestic operations. This trend is reflected in declining mortgage applications and reduced consumer lending, prompting banks to seek alternative revenue streams.
Another significant risk is the rising level of corporate debt across the region, particularly in South Korea, where non-financial corporate debt-to-GDP ratio hit 126.1% as of September 2023. While government stimulus measures have supported corporate borrowers, the risk of defaults in sectors such as manufacturing and shipping remains high. Banks are increasing loan-loss provisions in anticipation of potential credit deterioration, but the broader implications of high corporate debt levels pose a threat to financial stability.
Cybersecurity and technological disruption represent additional risks, with more Japanese banks expressing concerns over cyberattacks targeting online payment systems and customer data. As banks accelerate digital transformation efforts, the risk of data breaches and system vulnerabilities continues to grow. Regulators are urging financial institutions to invest in advanced AI-driven cybersecurity systems to protect critical infrastructure, but the cost of such investments is straining profitability.
Opportunities for growth
Despite these challenges, significant growth opportunities exist for banks in Japan and other advanced economies. In South Korea and Singapore, banks are benefitting from stronger economic performance and technological innovation. Both countries are leveraging their positions as financial hubs to drive cross-border fintech collaborations and attract international capital.
South Korean banks, for example, are at the forefront of digital payments and blockchain technology, with firms like KEB Hana Bank leading initiatives in digital asset management and decentralised finance (DeFi). Singapore’s banks, including DBS, OCBC and UOB, are expanding their footprint in China and India, capitalising on trade flows and digital connectivity. Australian banks remain committed to infrastructure financing and expanding their regional presence, with the Pacific emerging as a key area of strategic focus. This regional emphasis reflects a pragmatic approach by banks to strengthen their influence and sustain growth, reinforcing their critical role in the economic stability of neighbouring Pacific nations.
Regulators across Japan and other advanced economies are adopting policies that balance financial stability with economic growth. The BOJ continues to emphasise macroeconomic stability and inflation control, with policies that prioritise liquidity injections and bond-buying programmes to support the financial sector. However, Japan’s Financial Services Agency (FSA) is increasingly focusing on digital transformation and cybersecurity, mandating that banks strengthen their digital infrastructure and risk management systems to address rising cyber threats.
In South Korea, regulators are promoting digital banking licences and encouraging the development of neobank platforms to foster competition and financial inclusion. The introduction of regulatory sandboxes has accelerated innovation, allowing fintech firms to test new products and services under supervised conditions. Singapore’s MAS has adopted a similar approach, positioning the city-state as a global leader in green finance and digital banking regulation.
Regional diversification is a key growth strategy, with Japanese and South Korean banks expanding into ASEAN markets driven by growing digital economies and demand for financial services.
Japanese banks are investing in infrastructure, digital banking and green finance, including green bonds and sustainability-linked loans. The government’s 2050 carbon neutrality goal supports renewable energy financing.
Region: Middle East
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