It warns that if interest rates rise sharply in a short period of time, financial institutions could incur latent losses on their securities holdings.

Japanese financial institutions’ profitability has decreased significantly in the past 25 years, making them vulnerable to potential losses from any sharp rises in interest rates, the central bank said.

While many companies increased long-term, fixed-rate loans to take advantage of Japan’s ultra-low interest rates, some have suffered sluggish profits, the BOJ said in a report.

Banks’ lending to such low-profit firms may turn sour as interest rates begin to rise, the BOJ said in the report, which looked into the impact prolonged monetary easing had on Japan’s banking system.

“Financial institutions’ profitability has decreased sharply in the past 25 years,” with some regional lenders becoming more vulnerable to stress, the report said.

“If interest rates rise sharply in a short period of time, financial institutions could incur latent losses on their securities holdings,” which in turn could discourage them from lending, it said.

The report was compiled as part of a comprehensive review the BOJ is conducting on the pros and cons of past monetary easing steps.