TOKYO, June 20 Reuters Japanese financial institutions39; 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 on Thursday.

While many companies increased longterm, fixedrate loans to take advantage of Japan39;s ultralow interest rates, some have suffered sluggish profits, the BOJ said in a report.

Banks39; lending to such lowprofit 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 Japan39;s banking system.

Financial institutions39; 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.

The assessment underscores the BOJ39;s focus on how prospects of rising interest rates could affect Japan39;s banking sector, which have weathered a long period of ultralow rates.

Since deploying a massive assetbuying programme in 2013, the BOJ has kept interest rates ultralow through a radical stimulus programme to fire up inflation to its 2 target.

While the ultraloose…