Japan Firms Borrow More to Cover Materials Costs

Japanese bank lending in May rose at its fastest annual pace in more than a year, as firms
borrowed more to cover rising energy and material costs, but economists said the rise did not signal a stronger economy.

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The 1.5 percent increase from a year earlier was driven by higher costs, more local government borrowing and a low tally in the same month a year earlier, they said.

Fears of a deeper and more prolonged economic downturn, boosted after poor U.S. job figures on Friday, instead prompted financial markets to slash expectations for a BOJ rate hike.

Loans held by the country's four main categories of banks, including credit unions, stood at 453.9 trillion yen ($4.3 trillion), the Bank of Japan said in releasing the figures.

Rising raw material prices were behind the biggest rise in annual fund demand since January last year, a Bank of Japan official said, adding "lending was fairly firm".

The country's biggest banks, which had been cutting back on loans for more than a year, increased their lending to strong sectors, such as the automobile and shipping industries, but economists played down the significance of this.

"Because of expectations of rising prices, some manufacturers are now trying to secure inventories in advance," said Takahide Kiuchi, chief economist at Nomura Securities.

"Rising prices are also boosting needs for short-term funding. But we can't say fund demand is growing sustainably."

Japanese bank loans have been picking up pace after hitting a low of 0.1 percent growth in December from a year earlier, led by increasing demand for funds from large companies.

Lending by the country's biggest banks rose 0.2 percent in May from a year earlier, their first such increase since March last year.

Bank lending growth was also in part driven by increase in loans to local municipalities and economists said they doubted fund demand from the private sector would grow further.

"The latest data is neutral for the Bank of Japan's monetary policy. The relatively strong money data does not indicate firmness in the real economy. They have decoupled," said Kyohei Morita, chief economist at Barclays Capital. The data reinforced the uncertainty facing the Japanese economy, with prices rising amid fears of a global slowdown.

The Bank of Japan dropped its tightening bias in April, saying downside risks were the bank's main immediate focus.

Derivative contracts are pricing in about 45 percent chance of a rate hike by the end of year. Late last week, they had been almost fully pricing in a rate hike this year.

Rising inflation had stoked speculation of a BOJ rate hike recently.

BOJ data also showed M3 money supply rose 0.7 percent in May from a year earlier.

The Bank of Japan has revamped money supply data from this month to reflect recent changes such as a reorganisation of state-owned Japan Post, ahead of its planned privatisation, a rise in issuance of bank bonds and an increase in privately subscribed investment trusts.

The new M3 money supply data includes deposits at all deposit-savings institutions, including Japan Post and small agricultural institutions.