Record loan growth at Japanese banks highlights lack of liquidity

By Michiyo Nakamoto in Tokyo Published: December 9 2008 02:00 Last updated: December 9 2008 02:00 Japanese banks last month enjoyed record loan growth as companies rushed to put aside cash and maintain liquidity amid difficult conditions in the capital markets. Bank lending in the world's second-largest economy grew 3.6 per cent year on year, the strongest rise since records became available in 1992, as Japanese companies turned increasingly to banks to meet their funding needs. The unexpectedly strong expansion of bank lending last month follows loan growth of 2.3 per cent in October and comes as the government stepped up its pressure on banks to extend credit particularly to small and medium-sized businesses. Analysts said growth in lending - which eluded Japan's banks for years after the country's asset bubble burst - reflected tightening conditions in money markets and companies' fears of running out of cash, rather than higher economic activity. Faced with tightening liquidity, "companies are hoarding cash over the end of the calendar year," said one bank analyst in Tokyo. A representative of the National Federation of Small Business Associations said companies appeared to be rushing to secure funds out of concern latecomers would find it difficult to borrow. "Many companies are borrowing now because they see no prospect for sales in the new year," he said. Bank lending increased as the outstanding balance of commercial paper, which companies issue to investors for short-term funding needs, dropped nearly 10 per cent in November year on year. "With the CP market losing functionality and a shift to bank lending underway, businesses are confronting ever-tighter financial conditions as reflected in high term interest rates . . . (which, in turn) is feeding into deterioration in business conditions," said Goldman Sachs in a report. With Japan's recession expected to be prolonged, analysts forecast that the Bank of Japan's Tankan report, to be unveiled next Monday, will show that business confidence has plunged. To encourage banks to lend more, the government has said it will relax rules on capital adequacy ratios until March 2012 and expand its loan guarantees for small and medium-sized companies. Growth in bank lending has failed to stem corporate bankruptcies, which renewed their post-war record. Bankruptcies of listed companies have risen to a record 30 this year, according to Tokyo Shoko Research, overtaking the 29 bankruptcies in 2002 when Japan was mired in a banking crisis. Overall corporate bankruptcies rose 5.3 per cent year on year to 1,277, with more companies failing due to a lack of operating funds, said the research group.