SWEEP past the cash machines at the Sumitomo Mitsui bank in Tokyo’s Sangenjaya shopping district and instead enjoy the personal service. Uniformed concierges welcome every customer with a bow. A dozen

tellers are watched over by a manager who leaps up to meet elderly patrons. Transactions are concluded with carved signature seals stamped on paper contracts, and another round of bows.

Japan’s high-street banks are not just overstaffed. They are also overbranched. According to the World Bank, high-income countries have on average 17.3 commercial-bank branches per 100,000 adults. Japan has 34.1. If you include branches of the post office, a popular place for people to save, the Bank of Japan (BoJ) reckons the country is the world’s most overbanked.

Get our daily newsletter

Upgrade your inbox and get our Daily Dispatch and Editor's Picks.

Retail banks across most rich countries struggled to make money after the financial crisis. But Japan has been close to or in deflation for most of the past two decades. The result, according to a report last year by the BoJ, is “strikingly” low profitability. Return on assets for the 12 months ending in March 2017 was 0.3%, compared with 1% for those in America. “The entire banking system has to drastically shrink,” says Naoyuki Yoshino of the Asian Development Bank Institute, a think-tank.

A lingering culture of jobs for life is one reason it hasn’t done so yet. The nation’s biggest banks are, however, finally starting to act. The IMF warned last autumn that Japan’s big three, MUFG, Sumitomo Mitsui and Mizuho, are among nine global banks that suffer from persistently low profitability. Last year all three announced the closure of hundreds of branches and the elimination of 32,000 jobs between them in the coming decade. Mizuho will shed a quarter of its workforce. MUFG says it expects to replace thousands of employees by automating up to 100 of its branches. All that sends a signal to the rest of the industry, says Shinobu Nakagawa of the BoJ.

The megabanks are well-placed to find alternative sources of growth by expanding abroad, says Masamichi Adachi of J. P. Morgan Securities. Reckless lending in Japan in the 1980s and 1990s was followed by a round of mergers. Recapitalisation was complete by the mid-2000s. The result was that big Japanese banks were in a position to snap up some of the business left behind as American and British banks retrenched in Asia after the financial crisis. A spending spree began in 2012. MUFG bought stakes in banks in Vietnam, the Philippines and Thailand. Since 2012 the share of foreign loans by the big three has risen from 19% to 33%. As they retrench at home, this share will probably rise further.

The country’s 105 regional banks are worse-placed, says Mr Yoshino. Some are barely profitable and more than half are losing money on lending and fees. As the population has shrunk and aged, these banks’ problems have been exacerbated by young people moving to the big cities. Not only is their customer base being whittled away, but the customers they are left with are older people who are most likely to want personal service. The Fair Trade Commission, which regulates competition, has approved 15 regional bank mergers in the past decade and the pace is accelerating. But the Financial Services Agency (FSA), their regulator, is reluctant to put them under too much pressure. Many provide a lifeline to ageing communities and help prop up struggling companies.

The government thinks banks should start offering more funding to startups and smaller firms. It hopes that would stimulate economic growth more broadly, but also thinks it would help the banks themselves by creating new, profitable clients. Nudging risk-averse banks away from calcified business practices while trying to avoid a major shock to the system is a tricky line to tread. “We want them to realise that profitability is low so their business is not sustainable,” says an FSA official. “Mergers are one option but there is still plenty of room for increased productivity.”

As if all this was not hard enough, Japanese banks, like those elsewhere, must also cope with new, low-cost competition. China’s largest fintech company, Ant Financial, has recently set up an office in Tokyo. Line, a messaging service with 75m monthly users in Japan, wants to expand into financial services. SBI Sumishin, an online bank set up by SoftBank Group and Sumitomo Mitsui Trust Bank a decade ago, has quickly become Japan’s most popular mortgage lender, which Noriaki Maruyama, its president, attributes mainly to costs that are a fifth of its lumbering rivals’. It has shaved interest rates on home loans to 1.17% a year, compared with an average for major banks of 1.28%, by streamlining operations (using artificial intelligence to process loan applications, for instance).

Mr Maruyama says the front-office clutter of high-street banks can be stripped away, leaving only cash machines. Most transactions can be done on mobile phones, he says. It is not an uncommon vision for a banker. But other countries do not have such cosseted customers.

This article appeared in theFinance and economicssection of the print edition under the headline"Silver service"