It’s the rare corporate scandal that says virtually everything about why a top-three economy is underperforming. The shenanigans involve Suruga Bank, a regional institution headquartered in Shizuoka prefecture.

It had been touted in recent years as a role model amidst the negative interest-rate world. Executives at Suruga, it seemed, solved the riddle of generating healthy profits even as other regional lenders blamed the Bank of Japan for weak results.

The reality turned out to be quite different. Back in April, Tokyo’s financial watchdog started scrutinizing Suruga’s methods of making loans to customers for housing investments. Within days, its shares were in free-fall, posting the steepest losses since 1975.

Earlier this month, Suruga released an independent report. It concluded that aggressive internal profit goals led to corner cutting and fraudulent activity. The findings also shed light on why the BOJ’s epic reflation push isn’t working.

Never mind that Suruga likely isn’t an isolated case. The creative lending tactics there run directly to Prime Minister Shinzo Abe’s stated goal of strengthening corporate governance. “The tough domestic environment has affected the whole Japanese banking sector,” says analyst Kaori Nishizawa of Fitch Ratings, “and other banks may have allowed governance standards to slip in response to these challenges.”

But here’s the rub. The BOJ’s negative rate landscape is making it virtually impossible for regional lenders to make money via responsible lending tactics. That, in turn, reduces their willingness to extend the credit BOJ Governor Haruhiko Kuroda has been churning out since April 2013.

In other words, the supply of yen in the system is confronting a dearth of uses for it. So, banks hoard more and more government bonds.

It’s a dynamic Abe must internalize as he begins his third term. The success Abenomics has had to date owes to a weaker yen and a rare synchronized global recovery more than a reform Big Bang. BOJ largess and moves to improve corporate practices have been great for stock investors, less so for average households who haven’t enjoyed a sizable raise in a quarter century.

Yet Abe may rue the day he slow-walked vital upgrades. Along with US President Donald Trump’s trade war, demographic headwinds are intensifying just in time for Abe’s newest term. Last week, Tokyo said one in five Japanese are now over 70. And, as fate would have it, Suruga and other local lenders are on the frontlines.

As Fitch points out in a new report: Populations are “falling faster and aging more quickly in the regions than in the cities, undermining demand for most lending-related banking services. Moreover, regional banks face the challenge of developing infrastructure to efficiently service less-densely populated markets with older customers who can be uncomfortable with technology.”

There’s another national challenge of which regional banks are the vanguard: overcapacity. Abenomics sought to make Japan more about job growth from the ground up and less about regulators looking out for giant exporters at the top of the food chain. A failure of imagination and bold action means Abe’s policies have been better for Toyota and Sony than startups.

Regional banks, meantime, have long been where BOJ liquidity goes to die. There are roughly 100 of them strewn out across the nation, some centuries old. Such legacies make many of today’s CEOs less inclined to sell or merge operations. Post-traumatic financial stress from the 1990s makes many loath to take big risks.

The upshot is that regional lenders sitting on roughly US$2 trillion of deposits are protecting market share and their independence. What they’re not doing is helping the BOJ reanimate Japan’s animal spirits.

“There is a strong business case for mergers in terms of potential improvements in efficiency and greater ability to compete,” says Fitch’s Nishizawa. “Mergers would also support geographical diversification, helping to address risk concentrations. Execution remains challenging and mergers have in the past faced anti-monopoly challenges.”

This latter problem is being addressed, as evidenced by the recent merger of Fukuoka Financial Group and Eighteenth Bank. In the interim, though, troubling practices at Suruga dramatize the headwinds bearing down on Abenomics.

They show why the BOJ isn’t gaining traction, Abe’s corporate governance push isn’t succeeding and how the graying of the population is impeding growth. All in one corporate scandal.