The Bank of Japan issued a warning for the first time in 20 years that financial institutions may be over-extending real estate loans.

Nearly 60% of regional banks could suffer net losses a decade from now if corporate borrowing keeps falling at the current trend, the central bank said in a semi-annual report on Japan's banking system.

The report highlights the mounting demerits of prolonged monetary easing such as the damage it is inflicting on financial institutions' profits.

"As regional banks have generally not been able to secure profits commensurate with the increase in risk-weighed assets, their capital adequacy ratios and stress resilience have declined moderately. Should this situation persist, downward pressure on the real economy from the financial system could intensify," the BOJ said in the report.