Japan Bank Lending Rises at Fastest Pace in Two Years

By Finbarr Flynn

July 8 (Bloomberg) -- Lending by Japanese banks rose at the fastest pace in two years in June as higher raw-material costs increased short-term funding needs and amid an increase in loans to energy-related companies.

Loans excluding those by credit associations quickened for a sixth month, rising 2 percent from a year earlier, the Bank of Japan said today. Lending by Japan's 10 city banks, which include Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc., rose 0.9 percent, the second monthly gain.

``Banks are lending more to large companies that need more working capital because of soaring raw-material prices,'' said Michio Kitahara, associate director-general of the central bank's surveillance department. ``There were also a number of large loans to companies in energy-related sectors such as steel and oil and to automobile and electrical companies.''

Funding needs at exporters are increasing as iron ore, coal and fuel prices climb to records. That may pose a problem for some banks given Japan's economic growth is slowing and the loans are to pay for increasing costs rather than expansion, according to Credit Suisse Group.

``The nature of the funding demand is different from that seen when the economy is expanding,'' said Shinichi Ina, a Tokyo- based analyst at Credit Suisse in a report today.

The expansion in lending by banks excluding credit associations was the fastest since July 2006, when the central bank raised its key interest rate from near zero percent.

Regional Banks

Lending by regional banks continued to outperform those by larger lenders, rising 3.2 percent in June from a year earlier.

Credit Suisse said loans by regional banks to individuals and local governments probably accounted for most of the growth as lending to smaller companies declined.

Japan's largest banks are also lending to overseas companies as losses related to the U.S. subprime-mortgage-market collapse restrict the ability of their U.S. and European peers to extend credit, Kinya Okauchi, the new president of Mitsubishi UFJ Trust and Banking Corp., said this month.

Mitsubishi UFJ and Mizuho each lent about 40 billion yen ($374 million) to India's Tata Motors Ltd. to help fund its purchase of Ford Motor Co.'s Jaguar and Land Rover brands in March.

Sumitomo Mitsui Financial Group Inc., Japan's second-largest bank by market value, arranged a 50 billion yen syndicated loan last month for International Business Machines Corp.

To contact the reporters on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net