Japan's financial watchdog estimates that negative interest rates under the Bank of Japan's monetary easing policy will reduce profits for the country's three big banks by at least 300 billion yen ($2.96 billion) for the year through March 2017, the Nikkei business daily reported on Saturday.

The Financial Services Agency (FSA) expressed concern to the BOJ regarding the situation as it sees reduced profits weakening the banks' ability to extend loans, the Nikkei said.

According to FSA estimates, Mitsubishi UFJ Financial Group Inc's (8306.T) profit will fall by 155 billion yen. Sumitomo Mitsui Financial Group Inc's (8316.T) profit will be reduced by as much as 76 billion yen and that of Mizuho Financial Group Inc (8411.T) will be cut by 61 billion yen.

If the BOJ was to take interest rates deeper into negative terrain, the agency reckoned that the banks would suffer substantial further drops in profit as their interest rate income would suffer.

The BOJ implemented negative interest rates in February in a bid to boost the economy, under which it charges banks for parking some of their excess reserves at the central bank.

While negative rates reduce the cost of borrowing money for businesses, it can also eat away at banks' profits as they have to absorb the cost of negative interest rates.