Japan Bank Lending Slows as Funding Strains Ease

Growth in Japanese bank lending slowed to a seven-month low in May as firms stop hoarding cash and obtaining funds via capital markets gets easier, but the slowdown also points to a worrying drop in funding demand.

Companies need less money because they are reducing capital spending on the view that global demand won't return to the levels seen before the economic crisis, boding ill for the economy in the near term.

The balance of outstanding loans held by Japanese banks rose 3.1 percent in May from a year earlier, the smallest increase since October, after climbing a record 3.6 percent in December and January.

The tightness in Japanese financial markets has eased to levels before the collapse of U.S. investment bank Lehman Brothers in September that rocked markets worldwide.

"The initial reaction to the crisis seems to be over now. But company sales may not return to levels before the Lehman shock," said Yoshimasa Maruyama, an economist at trading house Itochu Corp.

Corporate bond issuance has also come back to life in recent months, with 693 billion yen of such bonds issued last week alone.

That rise means companies can rely less on short-term commercial paper, of which the outstanding balance in Japan fell 19.1 percent in May from a year earlier.

Until a few months ago, commercial paper issuance had been falling for a different reason, as investors did not want to buy for fear of any sudden corporate bankruptcies, analysts say.

To support these markets, the BOJ pledged to buy up to 3 trillion yen ($31 billion) of commercial paper and the government promised to guarantee loans for small firms as part of a stimulus package.

Some analysts now say such support may no longer be needed, and on Friday a Bank of Japan commercial paper-buying operation drew no bids from banks.

But while financial markets are showing a semblance of normality, the real economy will need more time to recover, analysts said.

Japanese manufacturers are likely to delay investment in plant and equipment until global trade grows more quickly, and that could slow Japan's recovery from its worst recession since World War Two.

Data showed on Monday that the country's current account surplus fell 54.5 percent in April from a year earlier as exports remained depressed and income gains from investment sagged.

The figure compared with a market median forecast for a 39 percent decline.

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Revised data due this week is expected to confirm that the world's No. 2 economy shrank a record 4.0 percent in the first quarter, according to a Reuters poll, due to weak investment, trade and consumption.

The economy may expand 0.5 percent in the second quarter, the poll showed, as overseas demand isn't yet strong enough for companies to rapidly increase output, while a deteriorating labor market is weighing on consumer spending.

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