Economic initiatives undertaken by the Japanese government and aggressive easing policies from the country's central bank have injected new growth momentum into the economy. According to a senior banking executive, however, that's come with some negative consequences.

The Bank of Japan's quantitative and qualitative easing policy has created market disruption and has hurt the safety and stability of Japanese financial markets, Nobuyuki Hirano, chairman of Mitsubishi UFJ Financial Group, told CNBC's Nancy Hungerford in Tokyo.

According to Hirano, as the central bank acquires more Japanese government bonds, the liquidity in that market is drying up. Meanwhile, the Bank of Japan's purchase of exchange-traded funds in stock markets is affecting the price mechanism, he added.

While Hirano said it is important to "carefully analyze" the balance between the benefits and adverse side effects, he added that the current interest rate policy means it is a "really tough environment for the banks, in particular regional banks."

Lower margins due to the Bank of Japan's long-running negative interest rate policy are giving many financial institutions, especially those focused mainly on the domestic market, a "real tough time," Hirano added.

Regional banks in Japan are medium and small-sized lenders that serve mostly people who live outside the major cities. In recent years, they have seen a decline in their profits from core lending and fees and they face dwindling prospects of growing their loan books due to Japan's rapidly aging and shrinking population.

For its part, MUFG, which is one of Japan's largest banks, has undertaken a number of initiatives to strengthen its position in the market, according to Hirano.

"In (the) domestic market, we're trying very hard to transform our business model from lending-oriented to more service-oriented, such as wealth management or money advisory services, and so on," he said, adding that the company is also focusing on technological developments and digital transformation.

Abroad, MUFG is trying to expand its geographical coverage to "capture the growth opportunity" in other markets.

For example, MUFG holds a 94.1% stake in Indonesia's Bank Danamon as well a controlling stake in Thailand's Bank of Ayudhya.

— CNBC's Yen Nee Lee contributed to this report.