Japan Bank Loan Growth Stalls in July, Ending Gains

By Finbarr Flynn

Aug. 8 (Bloomberg) -- Lending growth at Japanese banks stalled in July after accelerating for six months, as the nation's economy moved closer to a recession, making small companies more cautious about borrowing.

Loans excluding those by credit associations rose 2 percent in July from a year earlier, after growing at the same level in June, the Bank of Japan said today. Lending by Japan's 10 so- called city banks, including Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc., rose 1 percent, up from 0.9 percent in the previous month and the third consecutive gain.

``Some smaller companies are more cautious about borrowing for capital expenditures due to economic uncertainty,'' said Michio Kitahara, associate director-general of the central bank's surveillance department. ``Higher raw material prices are still driving demand from blue-chip companies for loans.''

Japan's Cabinet Office said this week there is a high possibility the economy has entered a recession, acknowledging that the longest postwar expansion has probably ended. Japan's six-largest banks, including Mitsubishi UFJ, reported declines in profit, before one-time gains, as rising provisions damped earnings in the first quarter ended June 30.

Lending by regional banks continued to outpace that of larger lenders, rising 3.2 percent in July, the same as a month earlier.

Bank Shares Drop

Mitsubishi UFJ fell 5.6 percent to 821 yen as of 9:46 a.m. in Tokyo trading, while Mizuho slid 3.4 percent, and Sumitomo Mitsui Financial Group Inc. dropped 4.5 percent. Banks were the fourth-worst performers among 33 industries in the benchmark Topix index.

Confidence among Japan's small and mid-sized companies fell to the lowest in six years as higher energy prices eroded profits, the Shoko Chukin Bank index of company sentiment showed last month. Wholesale inflation at a 27-year high is squeezing profits at small companies, which employ 70 percent of Japan's workers.

Large firms such as trading and steel companies are taking out short-term loans, extending for two or three weeks, to meet working capital needs, according to the central bank's Kitahara. Banks are also becoming stricter about lending to mid-sized and start-up real-estate companies, Kitahara added.

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