Central bank interest rates may be at historic lows but in many loan markets around the world companies are paying more to borrow, the eurozone debt crisis blunting lenders’ appetite for risk. Not so in Japan.
There, the biggest companies are able to borrow at record low rates relative to banks’ funding costs. The problem is that more than two decades after the bursting of Japan’s bubble, many groups are very reluctant to borrow.
Last week Mitsubishi Corp, the biggest of Japan’s trading companies, borrowed Y30bn for five years. It paid a margin of one basis point over three-month yen Libor, the lowest rate among 13 equivalent-term loans since 2004, according to Thomson Reuters. In August 2011, while global markets were contorted by fears over Europe, Sumitomo Corp borrowed Y21bn at a zero margin over six-month Libor.
Both are particularly high quality borrowers, rated double A minus with a stable outlook by R&I, Japan’s biggest credit-rating agency. But they are not exceptions. Indeed, the high-end market as a whole seems resistant to shocks. “Even post-earthquake, with all the talk of reconstruction sucking capital out of the loan market, there was barely a blip in corporate rates,” says Aziz Dean, head of corporate finance at Citibank Japan.
The ultra-low spreads are a symptom of two related phenomena: a broad lack of demand for credit, and very high liquidity at banks, especially in the regions.
Every quarter since 2000 the Bank of Japan has canvassed senior loan officers at large banks to gauge private companies’ demand for loans. Only rarely, and for very brief periods, has the index nudged above zero, signaling a stronger appetite for borrowing. Moreover, loan officers report that most requests for funds are precautionary, to provide cash on hand rather than to invest in anything lasting. Dealogic data show loans for working capital purposes, like Mitsubishi’s, accounted for more than two-thirds of the total in 2011, a ratio that has risen for seven straight years.
“Banks are very hungry for assets but the number of possible loan customers is small,” says Katsuya Hosono, head of corporate banking at Aozora Bank in Tokyo, noting that since Lehman’s collapse in 2008 the reluctance to borrow has been most acute among small to medium-sized enterprises. Aggregate loans outstanding at the nation’s banks fell for 22 straight months between December 2009 and September 2011.
The result is historically low costs of borrowing for those that do avail themselves of bank loans. In November the average interest rate on new loans originated by domestically licensed banks fell to 1.019 per cent, the lowest since the Bank of Japan started tracking the data in October 1993.
In the short term, few expect rates to turn meaningfully higher. Given the imbalance between supply and demand, “borrowers are just not willing to pay for liquidity”, says one investment bank head in Tokyo. Instead, banks try to make lending pay by seeking promises of more lucrative business, such as a bond issue, an equity deal or an interest rate swap program, further down the line.
If banks are doing little lending at home, they need to put their money to work somewhere. Last year Japanese lenders were two of the top four arrangers in Thailand, Malaysia and the Philippines. Between August and November the average increase in overseas assets at Japanese banks was almost 6 per cent year on year, helping the aggregate outstanding loan balance to remain steady at about Y412tn ($5.4tn).
But in recent years, much of the widening gap between deposits and loans – which was Y165.3tn in December, not far off the record Y167tn in June – has been steered towards Japanese government bonds.
Among the biggest banks, JGB holdings have more than doubled since Lehman. At Mitsubishi UFJ Financial Group, the nation’s largest by assets, holdings of JGBs of Y47tn exceeded loans to domestic companies of Y43tn at the end of September. Net gains on JGB sales at Sumitomo Mitsui Financial Group’s banking division in the first six months of the current fiscal year represented more than a fifth of group operating profit.
Lenders have turned into “fixed-income fund managers”, says Cameron Umetsu, economist at UBS in Tokyo. “That is why the fiscal deficit is so easily managed.”
That is a welcome development for the Japanese government, able to borrow 10-year money at the second-lowest spreads in the world. But for the country itself, analysts say, it is also a clear sign of stagnation.