Japan Bank Loans Accelerate Amid Frozen Corporate Bond Market

By Finbarr Flynn and Jason Clenfield

Jan. 13 (Bloomberg) -- Lending by Japan’s banks accelerated at the fastest pace in 16 years in December as the global credit crisis forced companies out of the corporate debt market.

Loans, excluding those by credit associations, rose 4.1 percent last month from a year earlier after jumping 3.6 percent in November, the Bank of Japan said. The growth rate was the fastest since February 1992 and the third straight monthly gain.

Banks boosted lending to Japan’s biggest companies after interest rates for firms issuing commercial paper surged following the September collapse of Lehman Brothers Holdings Inc. Lending by Japan’s 10 so-called city banks, including Mitsubishi UFJ Financial Group Inc., rose 4.2 percent after climbing 3.4 percent in November.

“It’s positive for banks in the short term as lending to blue-chip companies is increasing,” said Naoko Nemoto, an analyst at Standard & Poor’s in Tokyo. “Yet the increase shows companies are having difficulty issuing commercial paper and corporate bonds, illustrating the deterioration of the nation’s economy and financial markets.”

Mitsubishi UFJ, Japan’s biggest bank, fell 6.2 percent as of 9:58 a.m. on the Tokyo Stock Exchange while Mizuho Financial Group Inc., the second-largest by revenue, lost 5.5 percent. An 84-stock index tracking the nation’s lenders dropped 5.2 percent, extending its decline to 43 percent during the past 12 months.

The shrinking global economy and strengthening yen have caused a record decline in exports by Japanese companies, which plunged 27 percent in November from a year earlier. Toyota Motor Corp. has announced an 11-day closure of domestic plants.

Regional banks expanded lending 4 percent in December, compared with 3.8 percent a month earlier.

‘Taking Risks’

“Given the state of the economy and its outlook, banks may be taking risks beyond their capacity by increasing lending,” said Mitsushige Akino, who oversees about $430 million as chief investment officer at Tokyo-based Ichiyoshi Investment Management Co. “More lending potentially means more non-performing loans.”

The Bank of Japan has cut interest rates twice since October, lowering the key lending rate to 0.1 percent from 0.5 percent, and pledged to buy commercial paper for the first time to help companies get funding.

Japanese firms borrow about a fifth of needed funds by selling debt in the market and the rest comes from bank loans, central bank Governor Masaaki Shirakawa said last month.

Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo, said the increase in lending belies the funding crunch faced by smaller companies.

‘Shut Out’

“Banks choose to lend to the most creditworthy customers, so if larger companies that normally would have issued commercial paper shift to bank loans, it creates a situation in which smaller, relatively less creditworthy companies find it hard to borrow,” she said. “Those companies are getting shut out of the market.”

Japan’s economy probably shrank at an annual 12.1 percent pace in the quarter ended Dec. 31, the sharpest drop since 1974, Barclays Capital has said. Gross domestic product contracted at an annual 1.8 percent pace in the three months ended Sept. 30, the government said Dec. 9.

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