The escalating U.S.-China trade war has jolted financial markets and triggered an unwelcome yen rise, adding pressure for the BOJ to ramp up massive stimulus to head off risks to the export-reliant economic recovery.
With investors' risk aversion pushing down U.S. Treasury yields and narrowing the interest-rate gap between the United States and Japan, a cut to the BOJ's -0.1% short-term rate target is considered among the options to counter excessive yen gains.
But Ichiro Fujiwara, who heads an association of Japan's second-tier regional banks, said deepening negative rates would add to the cumulative pain on the banking sector from years of ultra-loose policy.
"The side-effects of such a step would be bigger and affect not just regional banks but the entire financial industry," said Fujiwara, who is also president of Bank of Nagoya - a regional bank based in the central Japanese prefecture of Aichi.
"The BOJ may say it will look at the benefits and costs of such measures. But for us, there would be no merits at all," he told Reuters on Tuesday.
Bank of Nagoya's home market is among the most competitive areas for lenders operating in Japan.
Home to auto giant Toyota Motor Corp and its parts suppliers, Aichi has plenty of profitable borrowers unlike other regions in Japan, which are struggling with shrinking populations and an exodus of companies to bigger cities.
But that has intensified competition among banks flocking to the prefecture seeking higher returns. The average lending rate in Aichi was 1.1% in the fiscal year ended March 2018, the lowest among all prefectures, according to research firm Teikoku Data Bank.
Bank of Nagoya is Aichi's second largest lender but only commands a market share of just over 10%, with more than 20 other banks and small trust associations crowding the market.
Fujiwara said he did not expect interest rates to rise much in coming years, as overseas economic uncertainty kept the BOJ from exiting ultra-loose policy.
That means regional banks needed to quickly come up with new ways to compete, though merging or consolidating business with other banks isn't necessarily the best option, Fujiwara said.
"I have absolutely no plan to do so," Fujiwara said, when asked whether Bank of Nagoya could merge or consolidate operations with other banks.
As with other regional banks, Bank of Nagoya needs to become less reliant on conventional lending and grow business through income streams like consultancy and advisory fees, he said.
"Merging or consolidating won't solve deeper problems."
(Reporting by Leika Kihara; Editing by Sam Holmes)
By Leika Kihara and Takahiko Wada